U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001

91–136 PDF 2014

S. HRG. 113–456 

ARE ALTERNATIVE FINANCIAL PRODUCTS 

SERVING CONSUMERS? 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

FINANCIAL INSTITUTIONS AND CONSUMER 

PROTECTION 

OF THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED THIRTEENTH CONGRESS 

SECOND SESSION 

ON 

EXAMINING THE SMALL-DOLLAR CREDIT MARKET TO BETTER UNDERSTAND THE SPECTRUM OFALTERNATIVE FINANCIAL PRODUCTS, CONSIDER POTENTIAL CONSUMER LENDING CONCERNS, AND REVIEW 

THE CURRENT FEDERAL AND STATE REGULATORY LANDSCAPE 

MARCH 26, 2014 

Printed for the use of the Committee on Banking, Housing, and Urban Affairs 

( 

Available at: http://www.fdsys.gov/ 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

TIM JOHNSON, South Dakota, Chairman 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

ROBERT MENENDEZ, New Jersey 

SHERROD BROWN, Ohio 

JON TESTER, Montana 

MARK R. WARNER, Virginia 

JEFF MERKLEY, Oregon 

KAY HAGAN, North Carolina 

JOE MANCHIN III, West Virginia 

ELIZABETH WARREN, Massachusetts 

HEIDI HEITKAMP, North Dakota 

MIKE CRAPO, Idaho 

RICHARD C. SHELBY, Alabama 

BOB CORKER, Tennessee 

DAVID VITTER, Louisiana 

MIKE JOHANNS, Nebraska 

PATRICK J. TOOMEY, Pennsylvania 

MARK KIRK, Illinois 

JERRY MORAN, Kansas 

TOM COBURN, Oklahoma 

DEAN HELLER, Nevada 

CHARLES YI, Staff Director 

GREGG RICHARD, Republican Staff Director 

DAWN RATLIFF, Chief Clerk 

TAYLOR REED, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor 

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS AND CONSUMER PROTECTION

SHERROD BROWN, Ohio, Chairman 

PATRICK J. TOOMEY, Pennsylvania, Ranking Republican Member 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

ROBERT MENENDEZ, New Jersey 

JON TESTER, Montana 

JEFF MERKLEY, Oregon 

KAY HAGAN, North Carolina 

ELIZABETH WARREN, Massachusetts 

RICHARD C. SHELBY, Alabama 

DAVID VITTER, Louisiana 

MIKE JOHANNS, Nebraska 

JERRY MORAN, Kansas 

DEAN HELLER, Nevada 

BOB CORKER, Tennessee 

GRAHAM STEELE, Subcommittee Staff Director 

TONNIE WYBENSINGER, Republican Subcommittee Staff Director 

(II)

C O N T E N T S 

WEDNESDAY, MARCH 26, 2014 

Page 

Opening statement of Chairman Brown ................................................................ 1 

Opening statements, comments, or prepared statements of: 

Senator Toomey ................................................................................................ 2 

WITNESSES 

G. Michael Flores, Chief Executive Officer, Bretton Woods, Inc. ........................ 4 

Prepared statement .......................................................................................... 27 

Responses to written questions of: 

Senator Brown ........................................................................................... 82 

Senator Toomey ......................................................................................... 84 

Senator Moran ........................................................................................... 87 

Stephanie Klein, Director, NetCredit Consumer Lending, Enova 

International ......................................................................................................... 6 

Prepared statement .......................................................................................... 28 

Nick Bourke, Director, Safe Small-Dollar Loans Research Project, The Pew 

Charitable Trusts ................................................................................................. 7 

Prepared statement .......................................................................................... 29 

Responses to written questions of: 

Senator Brown ........................................................................................... 89 

Senator Toomey ......................................................................................... 97 

Senator Vitter ............................................................................................ 104 

David Rothstein, Director, Resource Development and Public Affairs, Neighborhood Housing Services of Greater Cleveland ............................................... 9 

Prepared statement .......................................................................................... 43 

Nathalie Martin, Frederick M. Hart Chair in Consumer and Clinical Law, 

University of New Mexico School of Law ........................................................... 11 

Prepared statement .......................................................................................... 47 

Responses to written questions of: 

Senator Brown ........................................................................................... 109 

Senator Toomey ......................................................................................... 120 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

Letter from Thomas J. Curry, Comptroller of the Currency, submitted by 

Chairman Brown .................................................................................................. 123 

Letter from John W. Ryan, President and CEO, Conference of State Bank 

Supervisors ........................................................................................................... 125 

Statement submitted by The American Financial Services Association ............. 127 

Email submitted by Senator Vitter ........................................................................ 166 

(III)

(1) 

ARE ALTERNATIVE FINANCIAL PRODUCTS 

SERVING CONSUMERS? 

WEDNESDAY, MARCH 26, 2014 

U.S. SENATE, SUBCOMMITTEE ON FINANCIAL INSTITUTIONS AND

CONSUMER PROTECTION, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, Washington, DC. 

The Subcommittee met at 10:03 a.m., in room SD–538, Dirksen 

Senate Office Building, Hon. Sherrod Brown, Chairman of the Subcommittee, presiding. 

OPENING STATEMENT OF CHAIRMAN BROWN 

Chairman BROWN. The Subcommittee will come to order. 

Thank you all for joining us. I thank the witnesses for being here 

and arriving on time. Senator Toomey, thank you for your cooperation, and Senators Heller and Warren and Senator Vitter was here 

a moment earlier, I believe is returning. 

I want you to imagine that—we apparently are going to be called 

out to votes around 11, and there are four votes, so we will go as 

long as we can and likely dismiss, because there are four votes. If 

that means all of us, including Pat and I should keep our remarks 

within 5 minutes and ask all of you to do the same. 

Imagine you are 40 years old. Imagine you are living in Mr. 

Rothstein’s home State of Ohio. You are working at a steel mill in 

a union job. You are earning $60,000 a year. The plant shuts down. 

It could not compete. It might have been Oil Country Tubular 

Steel. It could not compete with illegal dumped imports from 

China. 

You manage to find a retail job working full-time making $22,000 or $23,000 a year. Your income is a fraction of what it used to be. 

Your costs are about the same, and some things—perhaps food, 

gas, health care—are going up. You may lose your home to foreclosure. You are just trying to make ends meet, hoping you can just 

buy enough time until your next paycheck, with the perhaps distant hope of a better-paying job. 

You applied for several credit cards. You were denied. You decide 

to take out a payday loan or loan against the title of your car, but 

the money from your loan runs out before the next pay period. Like 

80 percent of consumers in the CFPB’s recent study, you end up 

rolling over your loan. You end up, like the average borrower, rolling your loan over six or seven times, eventually paying $575 in 

fees that you cannot afford on a $400 loan. People are forced to 

turn to loans too often with triple-digit interest rates that trap 

2 

them in a cycle of debt that leaves them worse off than when they 

began. 

The Office of the Comptroller of the Currency said in 2003, about 

a different subject but similar in some ways, quote, ‘‘a fundamental 

characteristic of predatory lending is the aggressive marketing of 

credit to prospective borrowers who simply cannot afford the credit 

on the terms being offered.’’ The OCC was talking about mortgages 

in 2003. 

The results of predatory lending devastated millions of American 

families, far too many certainly in the States represented here, especially, I think, especially Nevada and Massachusetts—or Nevada 

and Pennsylvania and Ohio. During the financial crisis, one mortgage lender said, ‘‘If you have a pulse, we give you a loan. If you 

fog the mirror, we give you a loan.’’ 

I am concerned we are now seeing this definition of predatory 

lending at work in small-dollar loan markets. For years, payday 

loans and other short-term small-dollar credit products were marketed to consumers and policy makers as a one-time stopgap to get 

people through a temporary emergency. Now, we are seeing these 

products are being used to cover basic living expenses that lenders 

rely on repeat lending for their profitability. Obviously, a renewal, 

a rollover loan, is more profitable than the initial loan, which may 

not be that profitable to the lender. 

The cycle of a debt is a result of workers’ wages stagnating over 

the past decade, American families’ inability to accumulate enough 

wealth through savings over a lifetime spent working. Senator 

Toomey and I did a hearing on that, the bottom half of the population not being able to even close to saving any significant money 

for retirement. And the cycle of debt is a result of weak consumer 

protection, leaving consumers vulnerable to financial predators. 

This is a large problem. Twelve million Americans use payday loans for years. Small-dollar lending is an $80 billion per year business. There are more payday lending stores in the United States 

today than there are Starbucks and McDonalds combined. 

This problem is not simple. In my view, we need to raise the 

minimum wage. We need to extend unemployment insurance. We 

need to expand the Earned Income Tax Credit. All three of those 

rewarding work, so that people work hard, they get something and 

have some kind of decent standard of living. It puts money in people’s pockets. It grows the economy. 

We need to do more to encourage savings and wealth building. 

Senator Moran from Kansas and I have introduced legislation to 

promote prize-linked savings accounts to help consumers build assets. And we need a strong CFPB and robust consumer protections 

to ensure these products are affordable and sustainable. It means 

limits on cost requirements that consumers can repay their loan, 

products with longer repayment terms, and the ability to pay down 

principal. People who are working—and most of the people in these 

situations are—should have a little bit more to say for what they 

have—for the work they have done. 

Senator Toomey. 

STATEMENT OF SENATOR PATRICK J. TOOMEY 

Senator TOOMEY. Thank you, Mr. Chairman. 

3 

You know, I find this discussion always is a very interesting one 

to me. I think there is a broad acknowledgement that we have a 

huge segment of Americans who are what is sometimes described 

as underbanked. They do not have access to ordinary forms of credit, ordinary meaning that which typically higher-income, wealthier 

Americans have access to. And there is a vibrant, competitive market that meets the needs that they have, providing short-term credit in a variety of forms, under a variety of circumstances. 

And yet we have got people in this town who want to shut off 

this access to credit in a number of ways, use regulators to shut 

down the lending industry, directly or indirectly, sometimes by forbidding banks from providing basic services to these lenders. We 

have got some people who think the Government should take over 

the business. Let us have the Government do it, because the Government is so good at everything else it does. We have got others 

who think that the Government should dictate prices. That is what 

the Government is here for, it is to set prices for goods and services, and in this case, it would be the price of credit in the form 

of a cap on interest rates. 

There are lots of ideas that we hear, and the one idea that very 

seldom gets discussed is what about personal freedom? What about 

allowing free men and women to decide what works for them? I 

have got to say, there is a breathtaking underlying arrogance in 

the presumption by wealthy people who have never been in these 

circumstances that they know better than those people who make 

these foolish decisions and borrow this money from these institutions, an arrogance that suggests that, God forbid, we let people decide what is the most sensible thing for them to do in the circumstances that they face. 

And that is the fundamental premise here, that people must not 

be free to decide what credit vehicle is most suitable for them 

among the options that are available to them. We cannot let people 

decide for themselves. We must preclude a whole range of choices 

and force them into transactions that we sitting up here approve 

of. 

I just find that very, very disturbing. I know that view is not 

shared by everyone on this Committee. But, I appreciate the opportunity to have the discussion because I think we ought to hear 

from a wide range of opinions about this, and as for myself, Mr. 

Chairman, I hope that we will allow for a flexible and vibrant and 

dynamic marketplace that will allow people to access credit that 

they need in a variety of ways. 

Thank you. 

Chairman BROWN. Thank you, Senator Toomey. 

Senator Warren. 

Senator WARREN. I would like us to just get straight to the questions, so I will pass. Thank you. 

Chairman BROWN. Senator Heller, would you like an opening 

statement? 

Senator HELLER. No, Mr. Chairman. 

Chairman BROWN. OK. Thank you for that. Let me introduce the 

panel and get started. I appreciate Senator Heller and Senator 

Warren’s comments, or lack of comments. 

[Laughter.] 

4 

Chairman BROWN. Michael Flores is President and CEO of 

Bretton Woods, Inc. He has over 30 years of experience in the financial industry. He has testified to this Subcommittee before. 

Stephanie Klein of Enova is the Director of Consumer Lending 

for them, an online financial services company headquartered in 

Chicago. She oversees NetCredit line of Enova’s installment loan 

products. Welcome. 

Nick Bourke is with Pew Charitable Trusts. He is the Director 

of the Pew Charitable Trusts Safe Small-Dollar Loans Research 

Project, conducting research on consumer needs and perceptions, 

market practices, and potential regulations of payday and other 

small-dollar loan providers. Welcome, Mr. Bourke. 

David Rothstein is familiar to this Subcommittee, also. He is the 

Director of Research Development and Public Affairs for the Neighborhood Housing Services of Greater Cleveland. He has published 

dozens of research reports, editorials, pieces of testimony on asset, 

housing, and consumer issues and has added greatly to the public 

debate on these issues. 

Professor Nathalie Martin is the Frederick Hart Chair in Consumer and Clinical Law at the University of New Mexico School of 

Law. Her primary research focus is on small-dollar lending and 

public attitudes toward these products. Professor Martin, welcome. 

Mr. Flores, if you would begin. Thank you. 

STATEMENT OF G. MICHAEL FLORES, CHIEF EXECUTIVE 

OFFICER, BRETTON WOODS, INC. 

Mr. FLORES. Thank you, Chairman Brown, Ranking Member 

Toomey, and Members of the Subcommittee. I am grateful for the 

opportunity to speak with you today on the issues of consumer 

credit and also discuss the results of a report I recently completed 

on the customer and loan characteristics of online short-term loans. 

I worked in banking consulting for well over 30 years, and in the 

past 15 years, I have conducted research on short-term credit, including overdrafts and payday loans, and in the last 6 or 7 years, 

I have studied prepaid cards, as well. I am also on the faculty of 

the Pacific Coast Banking School of the University of Washington, 

where I teach a retail banking course. 

Based on my most recent research, which was commissioned by 

the Online Lenders Alliance, and analysis of other studies, the 

need for short-term low-dollar products is real and the demand is 

growing. I just noticed an article in the Washington Post. A Brookings Institution study says that now one-third of all households are 

living paycheck to paycheck, so the income is creeping up higher 

into the middle class for the need for short-term credit. 

The Center for Financial Services Innovation estimates the annual demand for unsecured short-term credit to be about $61 billion, of which $8.5 billion was of overdrafts, $4.5 billion of deposit 

advance products, which probably now will tend toward overdrafts, 

Internet payday loans of $18.5 billion, and storefront payday loans 

of $30 billion. The intent of this study was to build a first of its 

kind analysis. This is the largest data analysis commissioned by 

the industry to look at what data was available, both from the specialty credit bureaus as well as the lenders. We also wanted to 

comment on the strengths and weaknesses of the data that was out 

5 

there, establish a baseline from which future annual updates can 

be based, to try to provide an initial understanding of customer demographics and loan usage patterns, and, of course, compare this 

data to other research, such as Pew and CFPB in order to add information to this discussion. 

We analyzed over 60 million application records from the three 

specialty credit bureaus. That included nine million loan records 

over a 4-year period beginning in 2009. Because of certain constraints, and I will be happy to talk about that later, within the 

credit bureau data, we added an additional 1.6 million customer 

records from three lenders around the country. 

The key findings, for the most part, track closely with Pew and 

CFPB. Of course, there are a few exceptions. In general, the median age of the customer is 39, annual median income of $30,000, 

and they are generally paid on a bi-weekly basis. The average loan 

amount is about $400, but, I think, most interestingly, is that average loan amount has increased from 2009, about $380, to over $530 

in 2013. 

The average annual number of loans range from two to four, 

with 30 percent of customers having only one loan. This is where 

we differ a little bit from the other studies, and part of it is due 

to methodology and part of it is due to the data that was available. 

Annual days indebted range from 70 to 106 days, which compares to Pew’s analysis of 144 days and CFPB’s analysis of the 

storefront loans of 199 days. 

Finally, loan performance from the credit bureaus indicate 71 

percent of the loans were paid as needed, and 89 percent had no 

charge-off flags. 

I believe the growth in loan amount as well as the intensity of 

usage characteristics has led to a trend of the industry moving 

from the 2-week product to an installment product. The installment 

product, I believe, will provide more flexibility for the consumer 

and will lead to less cost for the consumer. That said, I still think 

there is a viable need for the 2-week product and that it fits within 

the continuum of credit services needs in that the 2-week product 

is going to be less expensive than an overdraft, and an overdraft 

is going to be less expensive than returning a check insufficient. 

Innovative companies, many of them operating exclusively on the 

Internet, are trying to develop innovative products to drive down 

cost. In my discussions with these companies, they say the real innovation is limited because of the patchwork of State laws that are 

out there. I believe Federal law is needed to establish consistent 

rules and regulations to allow these companies to innovate and 

drive down costs. 

I notice an interesting quote from the Office of the Comptroller 

of the Currency in 2011. I will paraphrase, but it is that in the 21st 

century, the Internet and the advent of technological innovations 

has accentuated the seamless—the geographic seamlessness of financial services products. So, we have let the genie out of the bottle. People can go on the Internet, see what products are available, 

but they are constrained by State regulations in terms of what 

products they can get. 

6 

I believe H.R. 1566 is probably the best vehicle currently available and enjoys close to 50–50 bipartisan cosponsorship to allow 

customers access to credit on a national basis. 

Thank you for your time, and I look forward to answering your 

questions. 

Chairman BROWN. Thank you very much, Mr. Flores. Thank you 

for staying within the 5 minutes, too. I appreciate that. 

Ms. Klein. 

STATEMENT OF STEPHANIE KLEIN, DIRECTOR, NETCREDIT 

CONSUMER LENDING, ENOVA INTERNATIONAL 

Ms. KLEIN. Good morning, Members. Thank you, Chairman 

Brown, for inviting me here today. Again, I am Stephanie Klein. 

I am a Director of Consumer Lending at Enova. We are a global 

leader in online financial services, headquartered in Chicago. I am 

really grateful for the opportunity to share some of our experience 

with you today. 

Senators, I am here to tell you about the exciting new credit solutions we have been developing, what we have learned, who we 

are serving, and how we can help underserved consumers have 

equal access to quality credit. We believe we can change the dynamics in the industry and provide a pathway toward upward mobility that will benefit millions of hardworking Americans who 

have been left behind by the traditional banks. 

At Enova, since our launch in 2004, we have been using advanced technology and analytics to create innovative products that 

meet consumers’ evolving credit needs. I oversee NetCredit. 

NetCredit is one of Enova’s newest installment lending products for 

U.S. consumers. With NetCredit, customers can borrow $1 to 

$10,000 and pay back over time in fully amortizing installments 

over 6 to 48 months. Payment amounts are typically just 6 to 8 

percent of gross paycheck, and we actually derived this ratio 

through rigorous testing of customer behavior. 

But just recently, we also released a new tool where customers 

can actually vary their payment amount online, and in real time, 

they can see the impact on the duration of the loan as well as the 

total cost of borrowing as they customize their payment. And interestingly, since we released this new tool, we have seen that customers, on average, are self-selecting that same 6 to 8 percentage 

of gross paycheck that we had calculated and targeted historically. 

So, I think this is a true testament to the power of the advanced 

analytics capabilities that we have developed over the past decade 

at Enova. 

Our customer demographic does present a unique challenge 

when it comes to pricing. While NetCredit customers typically have 

moderate incomes, usually ranging from about $40,000 to $60,000, 

and they always also have an active bank account, they have very 

low credit scores. Compared to the average U.S. FICO score of 689, 

90 percent of NetCredit customers score below 650, and the vast 

majority are actually below 600. So, we are really serving a very 

high-risk borrower who traditional banks are not willing or able to 

serve. 

Our answer to this challenge is a unique risk-based pricing algorithm. By leveraging multiple data sources and evaluating literally 

7 

hundreds of variables, we have been able to successfully distinguish high-risk borrowers from lower-risk borrowers and price accordingly. As a result of this innovation, NetCredit’s average interest rates are 50 percent lower than other leading online lenders, 

and almost 75 percent lower than a typical payday loan product. 

Furthermore, because we use the simple daily interest method, 

customers can save money by making early payments when they 

have extra funds. There are no fees to our loans, simple interest 

only, no origination, application fees, nothing up front. So, I think 

this is a benefit, and, in fact, one-third of our customers take advantage of this benefit and do choose to pay back their loans early. 

Over the past 2 years, we have been working hard to foster relationships with the major credit bureaus. We have dedicated significant resources to this effort and we are very excited to help customers start building credit with these products. This is a unique 

benefit that cannot be offered with 2-week products, but is possible 

with longer-term installment loans. 

Now that I have told you a little bit about what we are innovating and some of the benefits we can offer our customers, let me 

tell you about the significant challenges we face due to the current 

regulatory landscape. 

It is our belief that current State laws do not adequately serve 

consumers. Instead of working toward innovative solutions that can 

be scaled across 50 States, we are forced to develop new products 

for individual States within the constraints of antiquated consumer 

credit statutes that were never drafted with current technologies or 

Internet lending in mind. In many cases, instead of allowing customers a choice of quality credit products, the State law actually 

forces customers into the single-payment loan as their only option. 

Our mission at Enova is to create high-quality innovative products that can not only serve an immediate credit need, but can also 

help customers achieve a better financial future. We have 

proactively shared our experience with groups like the Center for 

Financial Services Innovation and the CFPB’s Project Catalyst in 

order to promote discussion on how we can design policies that help 

working families throughout the country achieve equal access to 

credit. We envision uniform Federal standards that enable innovation to meet the needs of today’s increasingly mobile, tech-savvy 

consumers. I encourage all of you to support legislation to modernize our laws for the benefit of the 68 million Americans in this 

country who do not currently have sufficient access to credit. 

Thank you, Chairman Brown, thank you, Committee Members, 

for allowing me to be here and share this testimony and I look forward to any questions. 

Chairman BROWN. Thank you, Ms. Klein. 

Mr. Bourke. 

STATEMENT OF NICK BOURKE, DIRECTOR, SAFE SMALL-DOLLAR LOANS RESEARCH PROJECT, THE PEW CHARITABLE 

TRUSTS 

Mr. BOURKE. Thank you, Chairman Brown and Ranking Member 

Toomey, Members of the Committee. My name is Nick Bourke. I 

am with the Pew Charitable Trusts. We are a large 501(c)(3) nonprofit organization. A big part of our mission is to generate good 

8 

quality research that helps inform good public policy, and I would 

like to focus today on the research that we have been conducting 

over the past 31⁄2 years about payday and small-dollar lending. 

Payday lending, as, Chairman Brown, you outlined very well, 

this is typically a 2-week balloon payment loan that is due back in 

full on the borrower’s next payday. Payday lending is an experiment that began in the early 1990s in this country, and the goal 

was to try to make more credit available to financially fragile consumers. Unfortunately, this experiment has not worked out too 

well. 

When people get a payday loan, the only real requirements are 

that they have a checking account and that they have an income 

stream. If they have those, and the lender then uses their unique 

power to leverage the checking account and gain access to the borrower’s checking account and income stream, that acts—that 

stands in for the underwriting. 

About 12 million people use these loans each year. Why do they 

use them? Well, in Pew’s nationally representative survey of payday loan borrowers, where we called people throughout the country 

and screened through about 50,000 people in order to get enough 

payday loan borrowers to give in-depth interviews to represent all 

borrowers across the country. We asked, what is your financial situation, and what payday loan borrowers said, 58 percent of them, 

was they have trouble paying their monthly bills half the time or 

more. And one-quarter of payday loan borrowers said they have 

trouble paying their monthly bills every single month. 

Most have debt already. More than half of payday loan borrowers 

have credit card debt. Forty-one percent own homes, so there are 

mortgages. Many of them have student loans. Many of them have 

auto loans. People are carrying debt. Almost all payday loan borrowers have a credit score, and the average score is 517. This indicates that people are already struggling with debt. They are at the 

bottom of the barrel in terms of credit score. 

They are failing out of the mainstream credit system. They are 

not trying to get into it. They have been there and they are failing 

out. This is really important to remember when we think about 

what is the right solution here and how can credit help them or 

how can it not help them. 

When we ask people, why did you get your payday loan, what did 

you use the money for, 69 percent of borrowers said that the reason 

they got their payday loan, unsurprisingly, perhaps, was to help 

them pay their bills—rent, utilities, credit card bills. Only 16 percent said that they turned to a payday loan for some kind of unexpected expense, like a car breaking down or a medical emergency. 

So, this paints a vivid picture of financial struggle and why people are turning to the loans. It also helps us understand why this 

product, why this market is not serving this consumer. 

A payday loan typically requires a balloon payment of $430, on 

average, out of the borrower’s next paycheck. The typical borrower 

is making about $30,000 a year. That is about $1,200 every 2 

weeks. The payday loan is requiring them to sacrifice one-third of 

their next paycheck toward a payday loan. That is unaffordable 

and it is not working. 

9 

The message that I want to convey is there is a solution. There 

is a way out of this. The status quo is not working. Pew has recommended five policy recommendations to help address this problem. 

The first one relates to an ability to repay principle. The payday 

loans are not working because they are fundamentally 

unaffordable. The way to address this is to require lenders to consider the borrower’s ability to repay. If one-third of the paycheck 

is too much to pay, what is the right benchmark? Our benchmark, 

based on research, is 5 percent. Loans should not take more than 

5 percent of a person’s paycheck unless the lender is doing some 

really serious underwriting to make sure that the borrower can afford it. 

Number two, spread costs evenly over the life of the loan. Simply 

turning the loans into installment loans is not going to work. We 

need to have some simple safeguards to make sure that the problems that we see in installment loan markets, with frontloading of 

fees and interest, large origination fees, giving incentive to refinance or flip loans, we need to protect against those. 

Number three, guard against harmful repayment or collections 

practices. Generally, we need to make sure that borrowers have a 

little bit more power, a little bit more security to stop electronic 

payments in the face of unscrupulous lenders or overly aggressive 

debt collectors. 

Number four, concise disclosure so people can get good information to make good decisions. 

And number five, States should continue to set maximum allowable interest rates because data suggests that the small-dollar loan 

markets serving people with damaged credit are not price competitive. 

Pew has done a case study in Colorado where they essentially 

implemented reforms along these lines in 2010, and what we saw 

there is that it worked. Access to credit has been maintained and 

borrowers are spending much less and being much more successful 

with reasonably structured loans with sensible safeguards. 

Thank you very much. 

Chairman BROWN. Thank you, Mr. Bourke. 

Mr. Rothstein, welcome. 

STATEMENT OF DAVID ROTHSTEIN, DIRECTOR, RESOURCE 

DEVELOPMENT AND PUBLIC AFFAIRS, NEIGHBORHOOD 

HOUSING SERVICES OF GREATER CLEVELAND 

Mr. ROTHSTEIN. Thank you. Senator Brown and Ranking Member Toomey, I appreciate the opportunity to testify before you 

today. Outlined in this testimony, I hope to convey the importance 

of strong regulation around small-dollar lending, particularly from 

the Federal Government, as local authorities, such as my State of 

Ohio, continue to wrestle to ensure that consumers receive safe and 

affordable loan products. 

It is imperative, as Nick discussed, that we look at the characteristics of the loan, such as APR interest and method of payback, to 

assess the quality of the products. First, the traditional payday 

loan model in Ohio is alive and, as in other States, does not serve 

families well. Research of actual borrowers continues to tell that 

10 

story in numerous ways, even in the report that was just released 

by the CFPB yesterday. 

I say that it does not serve them well because the average family 

takes out eight to 12 loans per year from one lender, typically purchasing loans in back-to-back transactions. This is absolutely the 

typical Ohio customer. This means as soon as their loan is repaid, 

they immediately reborrow to cover other expenses. This is also the 

prototypical discussion of what we call the debt cycle. 

Our housing and financial capabilities counselors in my office indicate that most clients that have one loan have about four other 

loans from other stores. Keep in mind that many families cannot 

afford to pay back the principal balance of the loan in just 2 weeks, 

let alone interest and principal. And if payback does occur, other 

monthly budget items, such as rent, utilities, food, and car payments, suffer. In sum, we see the people after they have exercised 

their freedom to take out these loans and they want out. 

Second, payday lenders in Ohio have morphed into auto title and 

installment lenders. This is quite typical and quite often more expensive. In 2008, the General Assembly in Ohio passed a bipartisan bill to curtail interest rates. The new APR was 28 percent interest. This is a significant reduction, since lenders before had been 

charging 391 percent interest. Despite spending at least $10 million in a ballot referendum to reverse the decision, not a single payday lender in Ohio uses the short-term loan act that was passed. 

Rather, they use two antiquated mortgage lending laws to sell 

loans at essentially the same price, if not more, than before. 

Most recently, as I indicated, in Ohio, stores are selling high-cost 

loans that use automobile titles as collateral rather than a 

postdated check. An auto title loan is often more dangerous than 

a payday loan in the sense that people can, and do, lose their cars 

once they are too far into debt. I have included in my testimony 

a three-part story from the Akron Beacon Journal about a working 

mother of three who lost her car and nearly her home after this 

loan. With the help of several nonprofits and the writer for the article, she was actually able to get her car back. 

Installment loans, the newest payday product in Ohio, are offered by payday lenders and they carry a similar triple-digit interest rate and use the Credit Service Organization statute to sell 

loans for up to 12 months. One loan that I analyzed from a store 

about 5 minutes from our office cost a borrower $5,000 to borrow 

$2,000 over a 12-month period. 

Finally, at NHS of Greater Cleveland, we practice what we 

preach. Since we advocate smart home ownership, we purchased 

our building in the recovering area of Slavic Village, Senator 

Brown’s new neighborhood. Since we are notably critical of payday 

lending, we are developing two alternatives. Working with the innovative startup company Employee Loan Solutions, we will be 

working with large employers to provide safe, underwritten, lowcost loans through paychecks. The lender is a CDFI focused on providing low-income families with affordable financial products. 

There is underwriting. There is no prepayment penalties and certainly no balloon payments. 

The other program is a small-dollar loan serviced and managed 

by NHS of Greater Cleveland. The intent is to comply with Ohio’s 

11 

payday lending law of under 26 percent APR. We will be much 

lower than that. We will be the only group in Ohio to comply with 

Ohio’s payday lending law. 

As this Congress and Consumer Financial Protection Bureau consider rules and regulations around small-dollar lending, a floor on 

small-dollar loans will encourage high-quality innovation. Nick 

mentioned their principles through Pew. I would also recommend 

CFSI’s principles around small-dollar credit. They are also quite 

strong. 

Lenders should be required to fully assess a borrower’s ability to 

repay a loan in full and on time without the need and use of cashing a check or electronic debiting an account. Just like mortgages 

or credit cards, ability to repay requirements protect borrowers 

from unsustainable debt. The litmus test for automatic payment 

should be that it is a convenience for the borrower, not a sidestep 

for debt collection laws. 

I really do appreciate your time today and I am looking forward 

to question and answer and I am happy to, again, answer any 

questions that you may have. Thank you for your time. 

Chairman BROWN. Thank you, Mr. Rothstein. 

Professor Martin, welcome. 

STATEMENT OF NATHALIE MARTIN, FREDERICK M. HART 

CHAIR IN CONSUMER AND CLINICAL LAW, UNIVERSITY OF 

NEW MEXICO SCHOOL OF LAW 

Ms. MARTIN. Thank you very much. Good morning, Chairman 

Brown, Ranking Member Toomey, and other Members of the Subcommittee. 

As Senator Brown indicated, my research focuses on high-cost 

loans, and I have done several empirical studies, including one in 

which we interviewed real borrowers curbside. I also work directly 

with consumers in our clinical law program, and as a result have 

had a tremendous amount of contact with actual borrowers of these 

types of loans. So, this borrower contact, I believe, informs my testimony today in a way that book research simply cannot. 

As I understand the goals of the hearing today, they are to identify fair, affordable access to credit for all, but fair and affordable 

are not words that I would use to describe the loans that are the 

subject of this hearing. 

We have not talked too much yet about interest rates, but I 

would like to do that for just a moment. Storefront payday loans, 

I think, as Mr. Rothstein said, typically carry an average rate of 

about 400 percent per annum and title loans about 300 percent per 

annum, but, of course, there is the risk of losing your car with 

those. 

With the installment loans, though, that Mr. Rothstein mentioned, that are generally designed to get around State regulation, 

the rates can be much, much higher. For example, one consumer 

that I know borrowed $100 and paid back $1,000 over a year’s 

time. The rate on that loan is 1,100 percent interest. And the important thing is that that loan is legal in many States. That is a 

legal loan. 

The biggest challenge we have, though, in terms of regulating 

these forms of credit is in the area of online lending. This is a 

12 

growing segment. It is growing by leaps and bounds. Those rates 

are higher than storefront payday loans—800 to 1,000 percent is 

very typical—and there is very little regulation of these online 

lenders. The SAFE bill that was proposed by Senators Merkley, 

Udall, and others will be very helpful, but I think it is also very 

important for the CFPB to have as much power as possible to regulate that form of credit. 

And on the topic of the CFPB, it is actually—as far as I am concerned, nothing is more critical at this moment than protecting the 

CFPB’s ability to regulate this entire high-cost loan industry all 

across the spectrum of small-dollar lending, not just focusing narrowly on payday lending, because of the loopholes that Mr. 

Rothstein talked about. 

You know, I also have been watching very closely and following 

every State law that has passed in order to curb these lending 

practices and watching in nearly every State as lenders find ways 

around the laws that pass. As new State laws pass, other than interest rate caps, interest rates and fees do not go down. Indeed, 

what happens is that they either stay the same, or usually, they 

go up after the new law. And, no matter how many lenders enter 

this market, no matter how many, the rate does not go down. So, 

what we can see is that the market is not working in this particular context. 

And we heard from Ms. Klein about an Internet lending company 

that may offer a new product that could be 75 percent cheaper than 

existing online loans, or 50 percent cheaper than storefront loans. 

Keep in mind, those would still be 200 to 300 percent loans. So, 

even if that is OK, my real bone to pick is with the idea that somehow this Federal charter is going to make the rates go down. That 

is not the history. If history is any indication, additional freedom 

imparted on the industry under this charter will only cause the 

rates to go up, or, at best, to stay the same. In any event, any bill 

that is proposed by industry, if looking at that, consider the compliance record of the existing industry. Is this the place we want to 

look for our solutions? 

So, what are the solutions and the alternatives? We have heard 

about some of them. One would be, of course, true underwriting of 

the loans, meaning the lender has to determine that the borrower 

actually has enough money to pay their regular bills plus the loan 

or the loan is not enforceable. 

Another very important thing, based upon the recent CFPB 

paper that came out yesterday, would be to prohibit rollovers and 

limit the numbers of loans through a national data base, and that 

means if the lender did not use the national data base, then the 

loan would not be enforceable. 

I think both of those are viable options. If lenders feel that this 

is too complex, there is always a much simpler solution, which 

would be a Federal interest rate cap. And, by the way, although I 

know not many politicians favor that, the general public very much 

does favor interest rate caps, and I have attached a paper to my 

testimony so indicating. 

I guess the last thing I would say is I am very excited about 

other options that are being developed in the marketplace, the 

13 

CDFIs that Mr. Rothstein spoke about as well as the idea of having 

the U.S. Postal Service get into this business. 

Thank you very much for your time. 

Chairman BROWN. Thank you, Professor Martin, and all of you, 

thank you for your trenchant testimony. 

You may have heard from Senator Toomey’s and my opening 

statements that we have a sort of different view of this and the role 

of Government, but I see some seeds of hope in Mr. Bourke’s testimony and Mr. Rothstein’s attempts in Ohio, and I hope there is a 

way we can get to some of these solutions for the unbanked that 

Senator Toomey spoke about. 

Let me specifically—I want to ask this directly to all of you, 

starting with Professor Martin—the Pew studies—I think there 

were three you did with some 50,000 calls to consumers, so a pretty 

good cross-section of people—show that consumers use payday 

loans even when they have cheaper credit liquidity available to 

them. Forty-one percent eventually paid off their loans using one 

of these options—credit cards, bank loans, pawn shops, other shortterm loans. Borrowers have chosen to use payday loans when there 

is liquidity in their checking account in many cases. 

Mr. Rothstein describes two products that Neighborhood Housing 

Services is developing. There have been reports about other affordable small-dollar products. You mentioned some of the examples in 

Colorado. Key Bank in Cleveland, a regional good-sized bank— 

midsized bank in Cleveland—has offered a $250 to $1,500 line of 

credit with a 14 to 19 percent interest rate, up to 5 years for repayment, two fees totaling $25. They say this product can be profitable. 

So, my question, starting with Ms. Martin and moving from my 

right to my left, is why do borrowers use the high-cost payday 

loans when there are, in many cases, alternative affordable—alternatives available to them that are affordable? What do these 

choices tell us about borrowers’ behavior? 

Ms. MARTIN. So, I think, initially, there is a confusion on the 

part of borrowers about the rates. So, if they hear, oh, the rate is 

$15 per $100, they think that is a 15 percent per annum rate, even 

though it is only for 2 weeks. It is a 400 percent loan. And in my 

study, I found that there were people who thought that was actually going to be cheaper than using a 25 percent credit card, for example. So, that is part of it. Enumerancy, in general. You know, 

people cannot do math. That is a problem that we have seen in society. 

And I think people also look at these—if there is a lender on 

every corner, they are thinking that is kind of a normal thing to 

do, and I have even heard people say, ‘‘Oh, no, I would not use a 

credit card for that. Those are only for emergencies.’’ So, I think 

the advertising, the ubiquity of the industry makes people think 

this is a better option somehow. 

Chairman BROWN. Mr. Rothstein. 

Mr. ROTHSTEIN. I think Nathalie is right on. I think there are 

two things, also, that our financial counselors have noticed. One is 

a sense of optimism in that people are generally feeling that in 2 

weeks, they will be in a better position than they are before, and 

14 

a lot of this has to do with just the nature of work and temp work 

and those kind of things, and often, they are not. 

And then the second thing is, I would argue, and I think the Pew 

studies, the CRL studies have really shown, that after the first or 

second loan is taken out, the choice to take out other loans becomes 

dramatically reduced because they are going to be short for their 

other expenses after they pay back the loan or after the lender 

runs the check through that they have postdated. So, I think the 

argument of after the first or second loan how much of a choice it 

is is debatable. 

Chairman BROWN. Mr. Bourke. 

Mr. BOURKE. In our second report, we identified six reasons why 

people use unaffordable payday loans, and one of them is desperation. Thirty-seven percent of borrowers in our survey said that they 

have been in such tight financial circumstances that they would 

take any loan on any terms. 

Other reasons relate to perception and reliance. A consistent 

theme that we have heard in focus groups with borrowers is that, 

hey, I already have enough debt. I already have enough bills. I do 

not need another bill. I do not want more debt. I have gotten in 

trouble with credit cards before. I am just going to get this payday 

loan because it looks like I can get in and get out quickly and I 

am not going to add another bill to the pile. The reality, of course, 

is very different. 

There are several other reasons, but one thing I want to point 

out, a good way to think about this and analyze it, I think, is to 

compare what the product looks like or how it is packaged to the 

reality of the situation. And in the conventional payday loan market, the product is typically packaged as a short-term product for 

unexpected expenses. In fact, the industry will typically say, do not 

use these loans for long-term use or anything more than a temporary need. 

But the business model of payday lending is built on extended 

usage and a lot of data shows this very clearly, including the payday loan study that came out yesterday from the CFPB. The vast 

majority of volume in the payday lending market, the vast majority 

of revenue comes from people who use the loans repeatedly over an 

extended period of time. And if most borrowers—or, I should say, 

if borrowers used the loans as packaged, the business model of payday lending would fall apart. It is absolutely reliant for its profitability on extended usage. 

Chairman BROWN. Thank you. 

Ms. Klein, is he right that your products from Enova and other 

companies are packaged for short-term one-time loans, but the 

model is something—your business model is something different? 

Ms. KLEIN. So, just to be clear, I do not run a payday loan business. I mean, my product is an installment loan. I cannot speak for 

others in the industry. What I can say for Enova is that we 

proactively in every State where we can have been moving toward 

longer-term loans. What I really like about the installment loan is 

under its Federal regulation, there are clear and transparent disclosures up front. So, when a customer borrows from us, they see 

the principal amount, they see the APR, they see the total finance 

15 

charge in dollars, which may make more sense to a lot of customers 

than an APR calculation, and they see the payment amount. 

So, really, in my opinion, you know, why do customers use these 

products? Because there is a need that is being unmet. If these 

other solutions people talk about were meeting the need, the products would not exist. So, there is absolutely a need and what we 

need to focus on is how do we bring higher-quality products to market at scale so that the millions of Americans who need them have 

access. 

Chairman BROWN. Mr. Flores, you have had the Online Lenders 

Alliance. You have done studies for them. Is Mr. Bourke right 

about that, that the packaging for short-term one-time loans is different from the actual business model? 

Mr. FLORES. Well, Senator, what I have tried to do with our 

studies is build data for the analysis of their product and how customers use their product. I have not done specific work for vendors 

or lenders within that industry. So, I cannot really comment on the 

business model versus the product. 

Chairman BROWN. OK. Senator Toomey. 

Senator TOOMEY. Thanks, Mr. Chairman. 

Ms. Klein, we have heard just now the characterization of the 

lending that goes on in this industry, the ideas that there is indiscriminate lending. Basically, if you have got a bank account and a 

job, you get a loan. There are balloon payments. People do not consider—lenders do not consider a customer’s ability to repay. Did it 

ever occur to you to consider a customer’s ability to repay, or are 

you indifferent to getting your money back? 

Ms. KLEIN. Thank you for asking that question. That is a great 

question. You know, obviously, if our customers cannot pay, we do 

not make money. So, if our customers are not successful, we are 

not successful. 

Just to give you a little insight—again, I cannot speak for everyone in the industry, but as to how NetCredit evaluates that—we 

are spending a lot of money, typically $30 to $50 per funded customer, on underwriting. We are pulling prime data, a Vantage 

score, you know, similar score from a prime bureau. And we are 

also pulling alternative data from about five different data sources. 

So, we use all of this data up front to try to come up with a loan 

offer that would be appropriate. 

Additionally, after a consumer expresses interest in that product, 

we are doing some sort of verification for everybody. Nobody gets 

an auto approval on the NetCredit loan. So, we are checking employment. For a lot of people, we are looking at bank statements. 

Because we are online, we are verifying identity. We do a ton of 

verification, and as a result of that, our approval rates are typically 

only 15 to 20 percent. So, this is not walk in, fog up a mirror. I 

do not know how you would do that in the online metaphor, 

but—— 

Senator TOOMEY. So you—— 

Ms. KLEIN. ——but that is not how we do our business. 

Senator TOOMEY. To be clear, so, you are rejecting applications 

from 80 to 85 percent of the applicants because they do not meet 

your credit standards? 

Ms. KLEIN. Correct. 

16 

Senator TOOMEY. Is that—— 

Ms. KLEIN. We reject 80 to 85 percent, and additionally, just to 

kind of speak on, well, these customers are desperate, not every 

customer that we approve chooses our product. And we see, especially online, it is much easier to comparison shop—— 

Senator TOOMEY. So, there is competition. 

Ms. KLEIN. and so once you make an offer, at least 40 percent 

of people typically walk away, and that is fine, and they are looking for the right choice for them. 

Senator TOOMEY. So, you are not able to set any old rate you 

like, because if you do, someone else who competes with you will 

set, presumably, a lower rate and competition imposes a discipline 

in this space. Is that a fair—— 

Ms. KLEIN. That is absolutely correct, and I would say, really, it 

has been recent, but in the past year, especially in the online space 

for installment lending, we have seen prices come down. I would 

like to think that NetCredit was one of the first lenders to start 

driving that effort, but we have actually seen other lenders innovating in the same way. And so I think competition can work online. 

Senator TOOMEY. It seems obvious to me, but just maybe you 

could confirm. The kind of underwriting you do would not have 

been possible, certainly, 10 years ago, probably not even 5 years 

ago, but advances in technology and access to data and evolving 

techniques have made this kind of underwriting possible recently. 

Ms. KLEIN. That is absolutely true. I mean, I will not waste too 

much of your time, but I could list off a ton of tools, data vendors 

that are available today that were never available historically, and 

we are constantly testing with new vendors. There is not a day 

that goes by where, in addition to the data we already use, we do 

not have a few other vendors where we are doing a retro study, we 

are saying, hey, here is some data, give us your data. How can we 

do better? How can we get smarter about underwriting? It is an ongoing effort. 

Senator TOOMEY. Thank you. 

Mr. Flores, I wanted to ask you a question and ask you to describe a little bit to us a program which, I think, has a name, 

called Operation Choke Point, if I have that right. My understanding of this is a systematic effort on the part of some bank regulators to pressure banks into not providing ordinary services to 

the short-term lending industry as a way to indirectly shut down 

this industry. Despite the fact that the industry is operating in a 

perfectly legal fashion and they might be very good and, in fact, 

profitable customers for the bank, it seems that some regulators 

believe that without any Congressional authority, they ought to be 

able to shut down an industry because they do not like it. Do I 

have that roughly correct, and could you—— 

Mr. FLORES. Yes, sir—— 

Senator TOOMEY. ——describe what is happening here? 

Mr. FLORES. ——that is correct. I believe what they have done 

is take what would be a shotgun approach. I mean, many of the 

lenders who are licensed in the States to operate are operating in 

a legal business environment and I do not see the cause to restrict 

them from access to the payment systems to conduct their busiVerDate Nov 24 2008 10:55 Dec 19, 2014 Jkt 046629 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 L:\HEARINGS 2014\03-26 ARE ALTERNATIVE FINANCIAL PRODUCTS SERVING CONSU
17 

ness. Now, yes, there are unlicensed offshore vendors and I think 

that a more targeted approach to address the unlicensed operators 

would be much more appropriate in dealing with the bad actors 

than just shutting down an entire industry. 

Senator TOOMEY. And, finally, if we had a new regulatory regime 

that forbids categories of transactions and puts Government dictated pricing limits on these transactions, is there any chance that 

some people who currently need and get access to credit will no 

longer have that access to credit? 

Mr. FLORES. Absolutely. It is the nature of price controls. The 36 

percent annual APR has been talked about a lot. In small-dollar 

lending, particularly to a high-risk customer group, given the cost 

of originating, servicing these types of credits, you cannot properly 

make those loans. Banks have gotten out of the business of smalldollar unsecured consumer credit, probably 15, 20 years ago when 

they migrated to credit cards and then overdrafts and then home 

equity lines of credit. So, it is a real problem. The deposit advance program is an example. That is close to $5 

billion of credit. And I talked to some people that were in the industry in those banks that say it is probably actually closer to $10 

billion, but you see FSI’s number of $4.3 billion of credit extended. 

That has gone away. The demand has not been ameliorated. 

Where does that go? Well, if these customers are customers of 

those banks that offered the product, the next likelihood for them 

to do is then the overdraft, which is going to be a much more expensive option than that deposit advance product. So, you limit 

supply of certain products, you are going to force customers—unless you somehow deal with the demand, you are going to force customers into products that are not suitable for them. 

Senator TOOMEY. Thanks very much. Thank you, Mr. Chairman. 

Chairman BROWN. Thank you, Senator Toomey. 

Senator Warren. 

Senator WARREN. Thank you, Mr. Chairman. Thank you for holding this hearing. 

So, there are 34 million families in the U.S. that are unbanked 

or underbanked, meaning they rely on check cashing, on payday 

lending or other financial services outside the traditional banking 

system. The cost for these families is huge. The average underbanked family makes about $25,000 a year and it spends about 

$2,400 a year just on interest and fees for basic financial services. 

In other words, that is nearly 10 percent of their annual income, 

about the same amount that they spend on food. 

Now, a primary reason that they spend so much is they cannot 

get to bank branches. It is a lot harder to open a savings account 

or a checking account if there is no branch in your area, and banks 

are rapidly abandoning low-income and rural neighborhoods. According to SNL Financial, a research firm, banks are systematically 

closing their branches in areas where the median income is under 

$50,000 at the same moment that they are opening more branches 

in areas where the median income is over $100,000, and that trend 

is expected to continue in coming years. 

So, a couple of months ago, a report from the Inspector General 

of the U.S. Postal Service recommended that the Post Office partner with banks and credit unions to provide basic financial servVerDate Nov 24 2008 10:55 Dec 19, 2014 Jkt 046629 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 L:\HEARINGS 2014\03-26 ARE ALTERNATIVE FINANCIAL PRODUCTS SERVING CONSU
18 

ices—check cashing, small-dollar savings accounts. With Post Offices in every ZIP code, that would solve the access problem. In 

fact, 58 percent of Post Office locations are in ZIP codes with zero 

or one bank branches. The Post Office could leverage its infrastructure to ensure that low-income families have both access to banking services, that rural families have access to banking services, 

and that those services are offered at a lower price. 

So, what I want to ask is, Professor Martin, do you think that 

partnering between the Postal Service and banks and credit unions 

could be a better way to serve low-income and rural communities 

and do it at a lower cost than the current alternatives? 

Ms. MARTIN. I do actually think that this is a viable alternative. 

I think there are just a couple of things to keep in mind. One, in 

the report, the Inspector General indicates that a couple of sample 

studies or small, you know, start in a couple places first, see how 

it goes, see how the profitability goes. It is very important that 

those be started in areas without storefront payday loans so that 

there is no issue about the hours and those kinds of things. 

And the other thing, of course, is who will be the partners and 

what will be the rates. But, assuming that the rates will be cheaper, as indicated in the report, I think this is a very viable alternative that should definitely be pursued. 

Senator WARREN. Mr. Rothstein, would you like to comment on 

it? 

Mr. ROTHSTEIN. Sure. Thank you, Senator. So, I think Professor 

Martin is right. I think the implementation phase would be the 

challenge. I think, theoretically, it makes sense, and it is actually 

done in Japan and Germany and other countries, which—the biggest hurdle, I think, besides implementation, would also be just 

sort of the—and we have heard some of those opinions just even 

recently, yesterday in Nashville and then here today, about the 

hostility toward the idea of the Government sector being involved 

in providing loans. So, I think that is the biggest hurdle. 

Senator WARREN. OK. Mr. Bourke, do you wish to comment on 

this? 

Mr. BOURKE. We are interested in the issue. We have not conducted research on it, but it is an issue we are interested in researching more. 

I would like to say a more general comment about why millions 

of people today are opting or looking outside of the banking system 

for something that the banking system is not giving them. So, I 

will focus specifically on some research we recently published about 

prepaid debit card usage. 

We found that the people who use general purpose reloadable 

prepaid cards, these are essentially checking accounts without 

checks. People can buy them on J-hooks in drug stores and use 

them as bank accounts. The driving factor of why people are using 

prepaid cards is to gain more control over their finances and to 

gain shelter from overdraft fees and the temptations of credit. People are seeking commitment devices to help them only spend the 

amount of money that they have and not get into trouble with credit and overdraft fees. Prepaid cards are giving that to them right 

now because, by and large, prepaid cards do not allow overdraft or 

spending more than people have. 

19 

And what we found, interestingly, is that seven out of eight prepaid card users either currently have or used to have a bank account. So, people are actually experienced in the banking system 

and they are starting to go outside of it. 

So, whether it is the Postal Service or anything else, I would say 

this is a very important finding because we are seeing people looking for something that they are not getting from the banks, and I 

think we should keep this in mind when we are thinking about 

what the services are going forward. 

Senator WARREN. Thank you very much. I see that my time has 

expired, and I just want to say, I think this gives us an opportunity 

to expand access, an opportunity to create some real competition 

here, and an opportunity to think more creatively about how it is 

that people of moderate income, how it is that people who live in 

rural areas get access to the banking services that they most need. 

And so I appreciate the comments on this. 

Thank you very much, Mr. Chairman. It looks to me like we have 

a win–win here. I would like to take advantage of it. 

Chairman BROWN. Thank you, Senator Warren. 

Senator Heller. 

Senator HELLER. Mr. Chairman, thank you and thanks for holding this hearing. I appreciate all of you being here and listening 

to you and the expertise that you bring to the table. 

Last week, the Fed Chair came out and said that one of the reasons that the economy is struggling to recover is because many 

households have limited access to credit, either because of their 

credit histories or the value of their homes being underwater. So, 

for many people, traditional banking products are not available to 

them, and it cannot be more true than in the State of Nevada right 

now, where, unfortunately, we need the Nation in foreclosures, 

short sales, and bankruptcies. So, we have alternative financing 

quite available in the State. 

Ms. Klein, I have a couple of questions for you. Customer satisfaction—what is the customer satisfaction on your product? 

Ms. KLEIN. Sure. So, we survey our customers once a month for 

all of Enova’s products. We consistently see greater than 90 percent 

satisfaction. We also see that nine out of ten would recommend this 

product to a friend, and that is saying a lot because people do not 

always want to talk about credit and how they are accessing credit. 

So, customers are very grateful for the products we provide and 

very satisfied with the service. 

Senator HELLER. What is your percentage of return borrowers? 

Ms. KLEIN. So, for NetCredit, because we are doing longer-term 

loans and we actually just launched this business in 2012, I do not 

have a lot of data on that. Our average loan is about 20 months. 

But, again, the loans are structured so that these customers can 

repay over time. I think we have talked a lot about the lump-sum 

payment. That can be difficult for some consumers, so we are trying to provide another option out there. 

Senator HELLER. OK. Alternative financing—can that help an individual’s credit score? 

Ms. KLEIN. Absolutely. A product like NetCredit can. So, typically with a payday product or a 2-week product, the bureaus will 

not accept that data. So, at TransUnion and Experion and Equifax, 

20 

even if you wanted to report performance data, they will not take 

it. They do not see it as relevant to their main customer who is a 

bank who wants to know if they should write a mortgage loan or 

an auto loan or a student loan. 

But, with these longer-term installment loans, the bureaus are 

happy to take that data, and we now have contracts with all three 

bureaus to start reporting our data. Again, these people have very 

low credit scores. I think you quoted a 517 or so average. We see 

that same, you know, 500 to 650 range. I think, without these 

products, people have no way to build back. So, this can be a starting point. These installment loans can get people back into the system, build credit with the major bureaus, and that way, they can 

access banking products in the future. 

Senator HELLER. Do you have any success stories? We hear all 

the horror stories. Do you have any success stories of people avoiding foreclosures, losing their cars? 

Ms. KLEIN. You know, I get emails all the time, so we actually 

have a feedback email, and I have that set to go directly to my 

inbox because I want to see firsthand the customer feedback, and 

definitely, we have customers all the time who email us. I would 

say, as our business grows, it is starting to be about one a day, and 

so I look forward to those emails. And people tell us, hey, this product was really a lifesaver. You know, without this product, I do not 

know what I would have done. 

Another thing that is interesting, everyone talked a lot about 

monthly bills, and one comment I want to make, you know, we do 

ask customers how they use the product, and sometimes people will 

say monthly bills. And then when you ask a little further, they say, 

well, you know, my mom was really sick and she was in the hospital and I had a lot of medical bills, blah, blah, blah. Now, 6 

months later, I am having a hard time paying my rent. 

So, when people say ‘‘monthly bills’’ and you stop there and you 

do not ask, what was really the cause, a lot of times, we see it was 

unexpected expenses. But what they need the money for today is 

their rent. And so when they say monthly bills, what they really 

mean is something happened a week ago, a month ago, or 2 months 

ago that drowned my savings, and because of that, I now need to 

borrow. 

Senator HELLER. Ms. Klein, thanks for you comments. 

Mr. Chairman, I have no further questions. 

Chairman BROWN. Thank you, Senator Heller. 

Senator Merkley. 

Senator MERKLEY. Thank you very much, Mr. Chairman. 

Mr. Flores, you argued in support of, I think it is H.R. 1566—— 

Mr. FLORES. Yes, sir. 

Senator MERKLEY. ——which essentially strips State laws. In Oregon, we have a 36 percent cap, and we put it in place in 2007. 

Since then, the citizens of the State have the access to those loans 

that, with the up-front fees, the annualized interest rate may be 

higher, but, essentially, on a longer-term rollover—because you can 

only use the fees once—the cost is much, much less than before. So, 

they still have access to credit, so there is no access to credit issue 

here. They just get it at a much, much cheaper price. So, why 

would anyone in Oregon want to roll back those State provisions, 

21 

as you suggest? Maybe you could just give one or two very short 

points of why an Oregonian would want to go from a 36 percent 

cap to no limit. 

Mr. FLORES. I do not think the bill precludes that companies 

could not offer—— 

Senator MERKLEY. There is no cap in the bill, right? 

Mr. FLORES. Pardon me? 

Senator MERKLEY. The bill—there is no cap in the bill. 

Mr. FLORES. That is correct. What I want to say—— 

Senator MERKLEY. Why would anyone in Oregon want to go from 

a 36 percent—— 

Mr. FLORES. I think a national charter would not preempt local 

companies from abiding by the Oregon statute. My point is choice. 

If the customer wants to use that product, that is fine. But the 

issue is the Internet. They can go out there and see other products 

that are available, and with the advent of that, these boundaries, 

these State boundaries really have gone away—— 

Senator MERKLEY. Thank you very much. I did not see anything 

in there that explained why someone would choose a 500 percent 

loan and why they would want access to that when they have the 

advantage of a much lower interest rate currently. 

Ms. Klein, you said you do not offer payday loans, so I went to 

your Web site here on the old pad and it immediately says upfront, payday loans. Why did you testify that you do not offer payday loans? 

Ms. KLEIN. So, I believe my specific words were that I do not operate our payday loan business. Enova has multiple products. My 

area of expertise—— 

Senator MERKLEY. I see. 

Ms. KLEIN. ——and the business that I have been running for 3 

years is NetCredit—— 

Senator MERKLEY. OK. 

Ms. KLEIN. ——which does only offer installment. 

Senator MERKLEY. So when I see—go to Enova and I see a payday loan, and I checked a 14-day loan it is 683 percent, you do offer 

payday loans, but you also offer this new product in installment 

loans. 

Ms. KLEIN. Correct. You know, Enova is actively moving and has 

actually transitioned several States in the past 2 years from payday loans to installment loans. But, we are so limited by State law 

that in some States, we are forced to offer just that 2-week solution, and that solution does not help people build credit—— 

Senator MERKLEY. OK. All right. 

Ms. KLEIN. ——so, it is a shame, in my opinion, but it is what 

we have to work with. 

Senator MERKLEY. Thank you very much. I found it very interesting that when we were debating putting a cap on payday loans 

in Oregon, the same arguments were made, that, somehow, citizens 

would feel they wanted more choice, the choice to have interest 

rates that drive them into a vortex of debt and drives them into 

bankruptcy. But, amazingly, since we passed this law in Oregon, 

I have never heard one Oregonian say that they are unhappy with 

the law, because they get the same access to credit but at phenomenally lower rates. 

22 

I was very struck by going to a food bank and having the director 

of the food bank say—the first thing she said to me was, ‘‘Thank 

goodness you passed that bill, because we used to have a stream 

of people coming to the food bank who were driven into bankruptcy 

by payday loans and now we do not.’’ 

If we can phenomenally increase the quality of life for millions 

of people across this country, why do we not do it? We have done 

it in Oregon. Why do we not do it across this country? Why would 

we possibly consider savaging State laws that—State laws that 

have improved the quality of life for millions of citizens? 

I want to tell you, the main thing I am concerned about is the 

opposite, and that is the effort of folks to exploit loopholes to continue to offer extraordinarily high interest loans in States that 

have deliberately put caps into place. We heard about Ohio. Well, 

in Oregon we covered all consumer loans and, therefore, what we 

see is the two loopholes are basically Federal chartered organizations that can bypass the State laws, and second of all, we see online lenders who illegally take payments out of Oregonians’ bank 

accounts through remotely generated checks and through electronic 

funds transfers. So, the SAFE Act that Senator Tom Udall and I 

are championing stops these predatory practices. 

Mr. Bourke, should not a person have control over their bank account in order to make sure that folks violating Oregon State law 

not just reach in and take their funds away from them? 

Chairman BROWN. And Mr. Bourke, answer very quickly. There 

are 10 minutes left in the vote and I want both Senator Menendez 

and Senator Vitter to get close to their 5 minutes, so give us a 

quick answer. 

Mr. BOURKE. Absolutely. Online lending is growing, but it is not 

growing because of State regulation. Online lending is at the same 

level in all types of States, regardless of whether payday loan 

stores are there. That is one point I wanted to make. 

Two, yes, we have seen in our research, and we will be publishing on this in the coming months, that in online lending especially, there is a big problem with people losing control of their 

banking accounts, being subject to unscrupulous lenders in some 

cases, aggressive debt collectors, and in some cases fraudsters who 

purchase information from lead generators. 

Senator MERKLEY. Thank you very much. 

Chairman BROWN. Senator Menendez. 

Senator VITTER. We are not—— 

Chairman BROWN. I am sorry. Senator Vitter, and then Senator 

Menendez. 

Senator VITTER. Thank you, Mr. Chair. Thank you all for being 

here. 

First, I want to say that I am absolutely supportive of all efforts 

to enforce the law, Federal law, State law, to cut out any abuses, 

any predatory practices. However, having said that, I am very concerned that that has expanded to an overall effort to shut down 

that entire industry, whether folks are following the rules or not. 

And I have heard many documented examples of that that really 

raise my concern. 

So, I wanted to ask Mr. Rothstein and Ms. Martin in particular, 

have you heard of Operation Choke Point and do you think it is 

23 

a broader effort and has morphed into a broader effort to shut 

down folks in that space, whether they are following law and the 

rules or not? 

Ms. MARTIN. I actually am not familiar with it. I am sorry. 

Senator VITTER. OK. 

Mr. ROTHSTEIN. Senator, I had never heard of it until it was 

mentioned this morning. I will say, though, that in Ohio, we have, 

as I testified earlier, we have about four different competing different loan acts that are being used and I think it would be hard 

to argue that the one that lenders are using the most in the storefronts, which is called the Ohio Second Mortgage Lending Act, 

which was designed for mortgages, makes sense for payday lending. 

Senator VITTER. OK. Let me go back to my concern. I have talked 

to a number of banks who have said their regulators are coming 

and telling them not to service folks in that sector, to stop that. 

And let me submit for the record an email that makes this point. 

This is from a bank to a customer who is in that business, and the 

relevant part is this. Quote, ‘‘Based on your performance, there is 

no way we should not be a credit provider. Our only issue is, and 

has always been, the space in which you operate. It has never been 

the service that you provided or the way you operate. You have obviously done a brilliant job. It is the scrutiny that you and now 

that we are under,’’ close quote. So, I would ask to submit this for 

the record. 

Chairman BROWN. Without objection, so ordered. 

Senator VITTER. I also submit for the record a similar email, 

again, from a bank to a customer, saying, we cannot work with you 

anymore. And it gets the same message across in somewhat more 

scrubbed, less direct language. 

Do you support regulators pushing banks to not service anyone 

in that space, irrespective of whether their customers in that space 

are following the rules or not? Mr. Rothstein. 

Mr. ROTHSTEIN. Yes. So, Senator, the—— 

Senator VITTER. It is a yes or no, and you can elaborate—— 

Mr. ROTHSTEIN. I just want to make sure I understand your 

question. 

Senator VITTER. Yes. 

Mr. ROTHSTEIN. So, you are asking, do I support the restriction 

of capital—— 

Senator VITTER. Do you support regulators pushing their regulated banks to cutoff credit to these customers, irrespective of 

whether these customers in that particular space are following the 

law, following the rules, or not? 

Mr. ROTHSTEIN. I would have to look at it more. 

Senator VITTER. So that is a close question to you. 

Mr. ROTHSTEIN. I just would have to look at the issue—— 

Senator VITTER. Ms. Martin. 

Ms. MARTIN. Yes, I am really not sure, either, because I do not 

know—without any facts, I cannot answer it. Sorry. 

Senator VITTER. Well, it was a pretty straightforward question. 

I find it very troubling that banks are being strongarmed to cutoff 

credit, to cutoff a lifeline to these businesses, even if these businesses are following the law. There is no issue in these two cases 

24 

and many other cases that they are not following the law, they are 

not following the rules. There is a determined effort from DOJ to 

the regulators to simply cut people out of that space, to cutoff their 

credit, to use other tactics to force them out of business. 

I find that deeply troubling, in part because it has no statutory 

basis and no statutory authority. We have rules. We should have 

rules. Maybe we need additional rules—we should debate them— 

about preventing any abuse, any predatory practices, et cetera. 

These are cases that do not involve any of that. 

Thank you. 

Chairman BROWN. Thank you, Senator Vitter. The basis is safe 

and sound practices, ultimately, and I would think that is where 

the regulators are looking here. 

Senator Menendez. 

Senator MENENDEZ. Thank you, Mr. Chair. I think this is an incredibly important hearing. 

I have many of the concerns some of my colleagues have expressed, but I also look at the FDIC report that says that one in 

12 American households is unbanked, meaning they do not have a 

checking or savings account at an insured depository institution. 

One in five American households is considered underbanked, meaning they have access to a deposit account, but they also rely on alternative financial services, such as nonbank check cashing or lending places. Together, these groups account for about 34 million 

households, about 61 million adults. That is about 20 percent of the 

American population. 

So, while I am concerned about their access to credit and to capital and to be able to get access to the monies that they need to 

get by and the terms under which they borrow, I am mostly concerned that I have not heard any real meaningful efforts to create 

the access that these individuals need. I have heard reforms to the 

existing system, but I have not heard about alternatives, and that 

is concerning to me. 

The other thing that is concerning to me is that I know in my 

home State of New Jersey, in fact, we have thousands of people 

who go online to borrow money, but these are entities that are offshore, which means there is no regulatory process in the United 

States that is supervising that. 

So, Mr. Flores, with reference to that legislation that exists over 

in the House about creating a national charter for online shortterm loans, what would that do both to the question of those who 

are offshore and the question of access to credit for people? 

Mr. FLORES. Well, I think it would certainly help eliminate that 

offshore unlicensed question. But to your point on folks in New Jersey, the analysis we did of the 60 million applications, the top ten 

States are 20 percent of the States in the country, 56 to 63 percent 

of applications came from those top ten States. Five of those States, 

including New Jersey, New York, North Carolina, are States that 

prohibit or limit payday loans or other short-term credit. So, the 

demand is there. As you are saying, people are going online, looking for the product. 

I think a national product with defined rules and regulations will 

benefit consumers such as your constituents in New Jersey and 

25 

others where State law inhibits their ability to gain access to credit. 

Senator MENENDEZ. Ms. Klein, what is—I think we have a good 

understanding of traditional short-term or payday lending models 

that have existed in States for years, but I am curious to know of 

any innovations to changes to loan products that may create more 

flexibility for consumers and at the same time help them to build 

credit histories that will move them toward more mainstream 

banking. Is there anything that your company does, or are you 

aware of others in the industry? And I am happy to listen to others, as well. 

Ms. KLEIN. Absolutely. Thank you for that question. And I really 

think the NetCredit product that Enova offers exemplifies what 

you are looking for. So, we have risk-based pricing. It is not a onesize-fits-all model. We can actually—we have the analytics and we 

have put the technology in place to distinguish high risk from low 

risk and price accordingly. We are giving customers the control to 

customize their payment amount, and again, in real time, as they 

change. If they want a lower payment, they see that tradeoff of it 

is going to take you longer to pay back and you are going to pay 

a higher total cost. So, giving the consumer transparency, power, 

control over designing their loan. 

Credit building that you hit on is one of the most important 

pieces, and again, these short-term products that are 2 weeks, I 

think they serve a place in the marketplace for some people. I 

think they are an appropriate product if someone can afford to pay 

back in full. We have seen a lot of data that that is not the case 

for everyone. And so for those consumers who are looking for larger 

loan amounts and longer term, a product like NetCredit would be 

great. 

The issue is, we are only in 12 States today. There are more 

States where you can offer a viable payday product that everyone 

here is saying is not ideal for a lot of people than States where you 

can offer a product like NetCredit that can build credit. 

Senator MENENDEZ. Realizing that we have a vote on, I am going 

to yield the balance of my time so that my colleague—— 

Chairman BROWN. Thank you. 

If you want to do one question, Senator Moran. Thanks for the 

work on prize-link savings you are doing, and, I mean, one really 

quick question, because the vote is imminent. 

Senator MORAN. Mr. Chairman, thank you very much. I was not 

expecting you to be so considerate, but this hearing is important. 

I have three going on at the same time this morning. 

But I wanted to, in listening to Senator Vitter, I would associate 

myself with his remarks. I do not understand why Members of 

Congress do not see this action by DOJ and banking regulators as 

a terrible intrusion upon Congressional authority. If there is a 

problem in this space, as Senator Vitter said, this is a matter to 

bring to Congress and for us to determine what the laws should be, 

what the regulation should ultimately result from that law. And so 

I miss the days in which there were Members of Congress who 

spoke for the role of Congress in making policy decisions as compared to deferring to regulators, and particularly in this case, to a 

regulator who is using their tremendous authority over financial 

26 

institutions to choke off access to credit to an industry that is currently legal. 

So, this whole thing just is terribly troublesome to me on a broad 

philosophical point of view, and I would say that we have agreed 

to sponsor legislation for Federal regulation of this industry if we 

can find colleagues in this Committee and elsewhere to join with 

us in that effort, and so if there is a problem, let us make certain 

that Congress plays its Congressional role. 

Mr. Chairman, thank you for the opportunity to speak. 

Chairman BROWN. Thank you, Senator Moran. 

Thank you to the whole panel. The vote is imminent, and Senator Moran and others, including I will do the same, will submit 

questions to you, and please get to us the answers as quickly as 

you can. Thanks for your input, and a good hearing. Thank you. 

The Committee is adjourned. 

[Whereupon, at 11:18 a.m., the hearing was adjourned.] 

[Prepared statements, responses to written questions, and additional material supplied for the record follow:] 

27 

PREPARED STATEMENT OF G. MICHAEL FLORES 

CHIEF EXECUTIVE OFFICER, BRETTON WOODS, INCORPORATED

MARCH 26, 2014 

Good morning, Chairman Brown, Ranking Member Toomey, and Members of the 

Subcommittee. I am grateful for the opportunity to speak with you today on the 

issues of consumer credit and discuss the results of a study my firm recently completed on the customer and loan usage characteristics of online short term loans. 

I have worked in banking and consulting for more than 30 years and in the past 

15 years I have conducted research short-term consumer credit including overdrafts 

and payday loans and studied prepaid cards for the last 6 years. I am also on the 

faculty of the Pacific Coast Banking School at the University of Washington where 

I teach a retail banking course. 

Based on my most recent research which was commissioned by the Online Lenders Alliance and analysis of other studies, the need for short-term, low dollar products is real and the demand is growing. 

The Center for Financial Services Innovation estimates the underbanked annual 

demand for unsecured short-term credit to be more than $61 billion with: 

• Overdrafts accounting for $8.3 billion (from a total of $38.3 billion in total overdrafts extended); 

• Deposit advance of $4.3 billion which, in my opinion, will now move to overdrafts given the exit from this market by six large banks; 

• Internet payday of $18.6 billion and Storefront payday equaling $30.1 billion. 

The intent of the study was to: 

• Build a first of its kind analysis within the industry to understand the data 

that is currently available from the specialty credit bureaus and lenders; 

• Understand the strengths and weaknesses of the currently available data; 

• Establish a baseline from which an annual update is planned; 

• Catalogue and understand customer demographics and loan characteristics; 

• Compare this data with all other available data including the Pew study and 

the CFPB report on storefront lending in order to add information to the discussion. 

We analyzed: 

• 60 million application records and nine million loan records from three specialty 

credit bureaus for a 4-year period beginning in 2009. 

• Because of certain constraints in the credit bureau data, we augmented this 

with 1.6 million customer records from three lenders and four loan portfolios. 

• The key findings track closely with Pew and CFPB with a few exceptions: 

• Customer median age is 39 with an annual income of $30,000 and is primarily paid bi-weekly; 

• The average loan amount was $388 with a range from $300 to $500 with the 

average loan amount increasing each year from $380 in 2009 to $530 in 2013; 

• The annual number of loans ranged from two to four with the 30 percent of 

the customers with only one loan; 

• The annual days’ indebted range from 70 days to 106 days as compared to 

the Pew research of 144 days and the CFPB storefront analysis indicating 199 

days of indebtedness. 

• Finally, the loan performance data from the credit bureaus indicate that 71 

percent of loans were reported as paid and 89 percent had no charge-off flag. 

I believe the growth of the loan amount as well as the intensity of usage measures 

has led to an important trend in the industry’s move from a 2 week product to an 

installment product with longer terms. 

These installment loans should be less expensive than the traditional 2 week 

product. That said, there is still value in the 2 week product because it fits into a 

continuum of credit services and is usually less costly than overdrafts which are less 

costly than returned NSF items. 

Innovative companies, many of them operating exclusively on the Internet, are 

trying to design flexible products to meet that demand. The emergence of peer to 

peer lending is another example of this trend. 

28 

In my discussions with many of these companies, they say real innovation is limited because of the patchwork of legacy State laws governing access to short-term 

credit products. 

Federal law is needed to establish the rules and regulations necessary to provide 

access to credit for consumers nationwide and allow companies the regulatory certainty they need to meet this growing credit need and to innovate and drive down 

costs. H.R. 1566 is designed to address this concern. The bill may need some work, 

but it has close to 50/50 bipartisan support in the House and offers the best current 

vehicle in Congress to help consumers. 

Thank you for your time and I look forward to answering your questions. 

PREPARED STATEMENT OF STEPHANIE KLEIN 

DIRECTOR, NETCREDIT CONSUMER LENDING, ENOVA INTERNATIONAL

MARCH 26, 2014 

My name is Stephanie Klein, and I am a Director of Consumer Lending for Enova, 

a global leader in online financial services headquartered in Chicago. Thank you for 

the opportunity to share Enova’s experience before this Committee. 

Senators, I am here to tell you about the exciting new credit solutions we have 

been developing, what we have learned, who we are serving, and how we can help 

underserved consumers have equal access to quality credit. We believe we can 

change the dynamics in the industry and provide a pathway toward upward mobility that will benefit millions of hardworking Americans who have been left behind 

by traditional Banks. 

At Enova, since our launch in 2004, we have been using advanced technology and 

analytics to create products that meet consumers’ evolving credit needs. I oversee 

NetCredit, one of Enova’s newest installment loan products for U.S. consumers. 

With NetCredit, customers can borrow 1 to 10 thousand dollars and pay back in 

fully amortizing installments over 6 to 48 months. Payment amounts are typically 

just 6 to 8 percent of gross paycheck. We derived this ratio through rigorous testing, 

but we have also released a new tool where customers can vary their payment 

amount and see the impact on total duration and total cost of borrowing in realtime. 

Our customer demographic presents a unique challenge when it comes to pricing. 

While our customers typically have moderate incomes, usually ranging from 40 to 

60 thousand dollars per year, they also have very low credit scores. Compared to 

the average U.S. FICO score of 689, 90 percent of NetCredit customers score below 

650, and the majority fall well below 600. In short, we are serving very high-risk 

borrowers who traditional Banks are not willing or able to serve. 

Our answer to this challenge is a unique risk-based pricing algorithm. By 

leveraging multiple data sources and evaluating hundreds of variables, we’ve been 

able to successfully distinguish high-risk customers from low-risk customers and 

price accordingly. As a result of this innovation, our average interest rates are 50 

percent lower than other leading online lenders and almost 75 percent lower than 

a typical payday loan product. Furthermore, because we use the simple daily interest method, customers can save money by making early payments when they have 

extra funds. In fact, roughly one-third of our customers choose to pay off their loans 

early. 

Over the past 2 years, we’ve been working hard to foster relationships with the 

major credit bureaus and have dedicated significant resources to building the technology necessary to report performance data. We are very excited to help our customers build credit history in order to achieve a brighter financial future. 

Now that I’ve told you about one example of how Enova is innovating and the 

benefits we can offer our customers, let me tell you about the significant challenges 

we face due to the current regulatory landscape. It is our belief that the current 

State laws do not adequately serve consumers. Instead of working toward innovative 

solutions that can be scaled across 50 States, we are forced to develop new products 

for individual States within the constraints of antiquated consumer credit statutes 

that were not drafted for current technologies or Internet lending. In many cases, 

instead of allowing customers a choice of quality credit options, current State law 

forces borrowers into single payment loans. 

Our mission at Enova is to create high-quality, innovative products that can not 

only serve an immediate credit need, but can also help consumers achieve a better 

financial future. We have proactively shared our experience with groups like Center 

for Financial Services Innovation and the CFPB’s Project Catalyst in an effort to 

promote policies that will help working families throughout the country achieve 

29 

1The Pew Charitable Trusts is a nonprofit, research-based organization. Our work includes 

providing research and analysis to help ensure a safe and transparent marketplace for consumer 

financial services. We conduct research that identifies the needs, perceptions, and motivations 

of those who use payday and similar loan products, as well as the impact of market practices 

and potential regulations. 2Pew’s telephone survey followed the highest methodological standards, including random 

digit dialing (RDD) to fixed-line and mobile phones in every State, a minimum of six attempts 

per phone number, and inclusion of Spanish speakers. The survey initially screened 49,684 respondents to identify a sufficient number of people who had reported using a payday loan (both 

storefront and online cohorts were established). Depending on the question, between 451 and 

703 payday loan borrowers completed the in-depth opinion survey. The margin of error for usage 

and demographic data from the survey is 0.2 percentage points. For the in-depth opinion research, the margin of error is between 4.2 and 4.6 percentage points, depending on the question. 

equal access to quality credit. We envision uniform Federal standards that enable 

innovation to meet the needs of today’s increasingly mobile, tech-savvy consumers. 

I encourage you to support legislation to modernize our laws. Thank you, Chairman Brown and Committee Members, for permitting me to present this testimony. 

I would be happy to answer any questions you may have. 

PREPARED STATEMENT OF NICK BOURKE 

DIRECTOR, SAFE SMALL-DOLLAR LOANS RESEARCH PROJECT, THE PEW CHARITABLE

TRUSTS

MARCH 26, 2014 

Chairman Brown, Ranking Member Toomey, and Members of the Subcommittee, 

thank you for the opportunity to join in your discussion about alternative financial 

services. My commentary will focus mainly on small-dollar loans, including payday 

and installment loans. Also included below are observations based on Pew’s latest 

research about general-purpose reloadable prepaid debit cards. 

As the director of the small-dollar loans project at The Pew Charitable Trusts, 1

I appreciate the opportunity to engage with you on these important consumer finance issues. The following comments are informed by in-depth research that Pew 

has conducted over the past 3 years. This research includes nationwide telephone 

surveys (representative of all payday loan borrowers, 2 and all prepaid card users), 

more than a dozen focus groups with consumers across the country, a case study 

of Colorado’s legislative decision to replace the conventional 2-week single-repayment payday loan with a 6-month installment loan, and other analysis. 

I. Small-Dollar Loans (Payday and Installment Loans) 

Pew has published three full-length reports in our Payday Lending in America series, as well as various summaries, all available at www.pewtrusts.org/small-loans. 

Data discussed throughout these comments are based on Pew’s research as well as 

analysis of industry and regulatory data, unless otherwise noted. For your convenience, I have appended to these comments a two-page summary of key findings from 

our payday and small-dollar loan research, and a copy of Pew’s policy recommendations for reform in this market. 

Background: Payday Loans and the Financially Fragile, ‘‘Thick-File’’ Consumers 

Who Use Them 

Thirty-five States allow conventional payday loans, and approximately 12 million 

Americans use payday loans annually. These are loans usually due in full on the 

borrower’s next payday and secured by a postdated check or authorization to debit 

a checking account. The loans average $375, have a term of about 2 weeks, and 

carry an average fee of about $55 per pay period. The median borrower keeps a loan 

out for 5 months of the year and spends $520 on finance charges to repeatedly borrow the same $375 in credit. 

Most payday borrowers (69 percent) in Pew’s national survey reported that they 

turned to the loan to get money to pay ordinary living expenses, including rent, utilities, and credit card bills. Only 16 percent of borrowers used the loans for an unexpected expense, like a car repair or medical emergency. 

The research paints a vivid picture of ongoing financial struggle. Six out of ten 

borrowers report that they have trouble paying bills at least half the time, with one 

quarter of all borrowers reporting that it is difficult to pay bills every month. Such 

persistent difficulty often leads to desperation. Thirty-seven percent of payday borrowers say that they have been in such a difficult situation that they would take 

any payday loan, on any terms offered. People who are facing such dire financial 

30 

3 Neil Bhutta, Paige Marta Skiba, and Jeremy Tobacman, ‘‘Payday Loan Choices and Consequences’’, Vanderbilt Law and Economics Research Paper, no. 12–30 (2012), http://papers.ssrn.com/sol3/papers.cfm?abstractlid=2160947. 4Pew’s survey shows that most payday borrowers have overdrafted in the past year. See also 

Consumer Financial Protection Bureau, ‘‘Payday Loans and Deposit Advance Products: A White 

Paper of Initial Data Findings’’ (2013), http:// files.consumerfinance.gov/f/ 

201304lcfpblpayday-dap-whitepaper.pdf. 5David Burtzlaff and Brittny Groce, ‘‘Payday Loan Industry’’ (Stephens Inc., 2011), 15. 

6 Robert DeYoung and Ronnie J. Phillips, ‘‘Payday Loan Pricing’’, (Federal Reserve Bank of 

Kansas City, Economic Research Department, February 2009), 7, http://www.kansascityfed.org/ 

PUBLICAT/RESWKPAP/PDF/rwp09-07.pdf. 7 Community Financial Services Association of America, ‘‘Is a Payday Advance Appropriate 

for You?’’ accessed Sept. 20, 2013, http://cfsaa.com/what-is-a-payday-advance/is-a-payday-advance-appropriate-for-you.aspx. 

circumstances report feeling grateful to receive payday loans, which usually require 

little paperwork. Yet most also say that the loans take advantage of them. 

While it is true that payday loan borrowers have few credit options available to 

them, it is not because they lack access to the mainstream credit market. Rather 

than being ‘‘thin-file’’ or ‘‘no-file’’ consumers who are creditworthy but unable to find 

lenders willing to do business with them, most payday loan borrowers are ‘‘thickfile’’ consumers who have substantial (negative) experience with debt. In other 

words, payday borrowers are not trying to get into the mainstream credit system; 

they are failing out of it. 

Typical payday loan applicants have poor credit scores in the low 500s, 3 indicating an assessment by credit reporting agencies that they are already overburdened with debt and/or struggling to meet financial obligations. More than half of 

payday loan applicants carry credit card debt, two in five payday borrowers own 

homes (many with mortgages), and many also hold other debt. Most payday borrowers also pay overdraft fees, and this fact is a reminder that payday loans do not 

eliminate the risk of overdrafting. 4

Loan Payments Average One-Third of a Borrower’s Next Paycheck—An Unaffordable 

Burden 

When a payday borrower gets a loan, he or she usually uses it to help pay rent, 

utilities, or other bills. The loan temporarily solves these problems. However, on the 

borrower’s next payday, the full amount of the loan—plus the fee—is due. For an 

average storefront loan, the amount due on payday is $430. For someone who makes 

$31,000 per year, the median payday borrower’s income nationwide, $430 represents 

36 percent of his or her bi-weekly income, before taxes. By contrast, Pew’s research 

has found that most borrowers cannot afford to pay more than 5 percent of their 

pretax paycheck toward a loan payment while still meeting their other financial obligations. 

Sacrificing one-third of their paycheck to repay a payday loan makes it harder for 

borrowers to pay their regular bills. Consequently, most renew or quickly reborrow 

a loan to make ends meet, with many retiring their debt only after a cash infusion, 

like a tax refund or assistance from family or friends, to repay the loan. While the 

loans are marketed as short-term fixes, they are usually experienced as long-term 

burdens. The average borrower carries payday loan debt for five months of the year, 

and most borrowing is consecutive (three-quarters of all payday loans originate 

within one pay period of a previous loan). 

Lenders’ profitability relies on this repeated usage. Industry analysts estimate 

that customers do not become profitable to payday lenders until they have borrowed 

four or five times. 5 Researchers at the Kansas City Federal Reserve found that ‘‘the 

profitability of payday lenders depends on repeat borrowing,’’ 6 a sharp contrast to 

official statements from the industry that payday loans are not meant as a longterm solution. 7 In Pew’s analysis, lenders’ reliance on long-term borrowing behavior 

indicates a fundamental flaw in the business model that can only be addressed by 

requiring loans to be structured differently (mainly, as installment loans). 

The required lump-sum payment far exceeds the borrower’s ability to repay, yet 

lenders maintain profitability by relying on some unique benefits granted to them 

by State laws. Payday lenders have the legal power to withdraw payment directly 

from borrowers’ checking accounts on their next payday, prompting those without 

enough money left for rent or other bills to repay the loans and quickly reborrow, 

effectively paying an interest-only fee to reset the due date to the next payday. This 

extraordinary form of loan collateral, which is achieved through use of postdated 

checks or electronic access to borrowers’ checking accounts, acts as a ‘‘super lien’’ 

against the borrower’s income stream that allows lenders to thrive even as they 

make loans to those who cannot afford them. This power to capture borrower income 

31 

8The Consumer Financial Protection Bureau, ‘‘CFPB Data Point: Payday Lending’’ (2014), 

http://files.consumerfinance.gov/f/201403lcfpblreportlpayday-lending.pdf. 

enables lenders to make small-dollar loans without underwriting them to ensure 

that the borrower can both repay the loan and meet other financial obligations without having to borrower again to make ends meet. 

The Lump-Sum Payday Loan Is a Failed Product 

Policy discussion in recent years has focused on whether payday loan customers 

need more access to credit, and what rate of interest is appropriate for such loans. 

These are valid questions, but there is insufficient evidence to know whether consumers are better off with or without access to high-interest loans (even if the loans 

have affordable payments). 

There is, however, sufficient evidence to conclude that conventional lump-sum 

payday loans harm consumers compared with loans that have affordable payments. 

It is clear that the lump-sum payday loan has inherent structural flaws that make 

it unaffordable and dangerous for consumers, and that new policies to eliminate this 

harmful product are warranted. Pew’s research and analysis show that clearly, and 

just this week the Consumer Financial Protection Bureau (CFPB) released a new 

white paper 8 with yet more proof that the lump-sum payday loan is a failed product. The CFPB’s analysis of millions of payday loan records vividly demonstrates 

that the payday loan is not the short-term product that it claims to be, and that 

costly, long-term borrowing is the rule and not the exception. The report also shows 

that anything short of fundamentally reforming how small-dollar loans are structured would be an inadequate policy response to these problems. Overall, the 

CFPB’s latest report sets a high bar for what the policy solution needs to be, and 

it leaves little doubt that the CFPB should require an ability to repay standard for 

the small-dollar loan market. Pew’s research shows that such reform would eliminate the worst problems in this marketplace without significantly impacting access 

to credit. 

Pew’s Policy Recommendations for the Small-Dollar Loan Market (Payday and Installment Loans) 

Pew has called on policy makers to act urgently, and take one of two approaches 

to addressing this problem. Policy makers can choose to prohibit high-cost payday 

loans altogether (as 15 States have done), or permit them only with substantial 

structural reforms to ensure the loans have affordable payments and follow a few 

sensible safeguards to ensure a safe and transparent marketplace. 

To support the CFPB and other policy makers, Pew has proposed five regulations 

for reforming payday loans. These rules will minimize harm to consumers and make 

all small-dollar loans more affordable. To ensure an effective and simplified regulatory environment for all lenders, these recommendations are intended to apply to 

all small-dollar loans, including payday and installment loans, with the exception 

of pawn loans. What follows is a summary (detailed recommendations are attached). 

1. Limit payments to an affordable percentage of a borrower’s income. Monthly 

payments above 5 percent of monthly pretax income are unaffordable for most 

borrowers. Loans requiring more should be prohibited unless rigorous underwriting shows that the borrower can repay the loan while meeting other financial obligations. 

This recommendation is intended to provide a clear yet flexible ability-to-repay 

standard, one that may accommodate lenders by providing for a low-cost and 

streamlined underwriting process while requiring most loans to be restructured 

as affordable installment loans (as opposed to unaffordable lump-sum repayment loans). Such a standard is flexible, easily accommodating various levels 

of income, pricing, and loan size. 

2. Spread costs evenly over the life of the loan. Front-loading of fees and interest 

should be prohibited. Any fees should be spread evenly over the life of the loan, 

and loans should have substantially equal payments that amortize smoothly to 

a zero balance. 

This recommendation addresses a common problem found in installment loan 

markets intended to serve those with damaged credit histories. When origination fees or other front-loaded charges make the first month of a loan substantially more profitable for the lender than subsequent months, lenders have an 

incentive to encourage borrowers to refinance loans. When loans are frequently 

refinanced, borrower costs increase dramatically, lenders can mask defaults by 

inviting struggling borrowers to skip a periodic payment in exchange for forVerDate Nov 24 2008 10:55 Dec 19, 2014 Jkt 046629 PO 00000 Frm 00035 Fmt 6621 Sfmt 6621 L:\HEARINGS 2014\03-26 ARE ALTERNATIVE FINANCIAL PRODUCTS SERVING CONSU
32 

9The Pew Charitable Trusts, ‘‘Payday Lending in America: Policy Solutions’’ (2013), 22, 

http://www.pewstates.org/research/reports/payday-lending-in-america-policy-solutions85899513326. 

feiting previously repaid principal, and the overall length of indebtedness can 

extend indefinitely. 

3. Guard against harmful repayment or collections practices. Policy makers 

should prevent or limit the use of postdated checks and automatic withdrawals 

from borrowers’ bank accounts. They should also make it easier to cancel automatic electronic withdrawals and protect against excessively long loan terms. 

This recommendation is focused on protecting borrower checking accounts by 

ensuring that borrowers have the power to stop payments or close accounts to 

avoid unscrupulous or fraudulent lenders. It also recognizes that some smalldollar loans could have affordable periodic payments yet require repayment 

terms that last an unconscionably long time unless policy makers require shorter terms or ensure that each periodic payment includes a substantial principal 

reduction. 

4. Require concise disclosures of periodic and total costs. Loan offers should clearly disclose, with equal weighting: the periodic payment schedule, the total repayment amount, the total finance charge, and the effective annual percentage 

rate (APR) inclusive of all fees. 

To make good decisions, borrowers need clear and reliable information. 

5. Continue to set maximum allowable charges. Almost every State sets maximum allowable rates on some small-dollar loans because these markets serving those with poor credit histories are not price competitive. Policy makers 

may limit rates to 36 percent or less if they do not want payday lenders to operate, or somewhat higher if they do. 

Research Shows Safeguards Can Work: A Case Study From Colorado 

In 2010, Colorado lawmakers agreed that the State’s 18-year experiment with 

conventional payday lending had led to unintended and harmful consequences. They 

dramatically changed the State’s payday loan law, shifting from allowing lump-sum 

repayment loans due in full on the borrower’s next payday to requiring that borrowers be allowed at least 6 months to repay the loans. This major change provided 

a research opportunity to study the small-dollar loan market and its impact on borrowers before and after the law change. Pew’s report, Payday Lending in America: 

Policy Solutions (2013), discusses the Colorado case study in detail. 

Colorado’s experience with their new payday loan law demonstrates that reforms 

such as those listed in Pew’s policy recommendations are viable for both borrowers 

and lenders. There are at least eight clear benefits of Colorado’s structural payday 

loan reform: 

1. Borrowers maintained access to credit; 

2. Lenders are still in business (half of stores still open in locations throughout 

the State); 

3. Loan payments are more affordable (4 percent of paycheck now vs. 38 percent 

before); 

4. The average borrower spends less ($277 now vs. $476 before); 

5. Lender-charged bounced check fees are down 57 percent; 

6. Defaults per year have declined 30 percent; 

7. Making the loan safer and more affordable reduced the amount of oversight required to ensure consumer safety; 

8. Credit counselors and elected officials report fewer people coming to them with 

payday loan problems. 

Payday Borrowers Want Policy Makers To Act 

On a final note regarding small-dollar loans, borrowers overwhelmingly want policy makers to act. Pew’s nationally representative survey shows that, by a 3-to-1 

margin, payday loan borrowers want more regulation of this market. Most borrowers favor requirements that would restructure payday loans into installment 

loans with more affordable payments. For example, eight in ten favor a requirement 

that loan payments take up only a small amount of each paycheck. 9

33 

10The Pew Charitable Trusts, ‘‘Why Americans Use Prepaid Cards’’ (2014), 7. 11 Ibid., 14. 

II. Prepaid Debit Cards and Why Some Consumers Are Turning Away From 

Banks 

The following section highlights findings from recent Pew research about generalpurpose reloadable (GPR) prepaid debit cards. GPR prepaid cards act like checkless 

checking accounts and are available from a wide range of companies, including 

many nonbank, alternative financial services providers as well as an increasing 

number of bank providers. 

Millions of Americans are turning away from banks for some or all of their financial needs, because nonbank products are providing something most banks are not. 

A key finding from Pew’s consumer research in the prepaid card market is that for 

many consumers, what they are seeking is better control over their finances—including safety from overdraft fees and security against overspending and the temptations of credit. Attempts to serve these consumers will be more successful if they 

are designed to help achieve these goals, and regulators should help ensure that 

consumers can successfully achieve the control and security that they seek. As explained further below, Pew’s research has led us to conclude that GPR prepaid cards 

should not have overdraft or other automated or linked credit features, and that the 

CFPB should prohibit such features. 

There Is a Large and Apparently Growing Group of Consumers Who Have Used the 

Banking System But Are Going Outside of It for Some or All of Their Financial 

Services Needs 

Nationwide, 88 percent of GPR prepaid card users either have or used to have 

a checking account (59 percent of all prepaid users currently have a checking account). In other words, the vast majority of people who use prepaid cards have experience with bank accounts but have opted to go outside the banking system for some 

or all of their financial services. 10 (The prepaid card market is growing rapidly; a 

short summary of who uses prepaid cards is attached at the end of this comment 

letter.) 

The Desire To Gain Control Over One’s Finances—and Avoid Overdraft and the 

Temptations of Credit—Is Leading Millions To Seek Services Outside the Banking System 

The fact that so many prepaid card users have or used to have bank accounts 

raises an important question: Why are so many people looking for financial services 

outside the banking system? Pew’s nationally representative survey data show 

clearly that prepaid card users are trying to regain control of their financial lives, 

chiefly by avoiding debt; not spending more money than they have; avoiding overdraft fee; and insulating themselves from the temptations of credit . 

34 

12The Pew Charitable Trusts, ‘‘Consumers Continue To Load Up on Prepaid Cards’’ (2014), 

9-10, www.pewtrusts.org/prepaid. 13The Pew Charitable Trusts, ‘‘Checks and Balances: Measuring Checking Accounts’ Safety 

and Transparency’’ (2013), http://www.pewstates.org/research/reports/checks-and-balances85899479785. 14The Pew Charitable Trusts, ‘‘Overdraft America: Confusion and Concerns About Bank Practices’’ (2012), www.pewstates.org/uploadedFiles/PCSlAssets/2012/SC-IBOverdraft%20America(1).pdf. 15For Pew’s policy recommendations, see The Pew Charitable Trusts, ‘‘Consumers Continue 

To Load Up on Prepaid Cards’’ (2014), www.pewtrusts.org/prepaid. 

And the reason that consumers are turning to prepaid cards to find this control 

is also clear: prepaid cards on the market today generally do not let consumers 

spend more money than they load onto the cards in the first place. In Pew’s analysis, only eight percent of prepaid cards from the major national providers disclose 

an overdraft feature. The vast majority of cards explicitly disclose that overdraft is 

not possible (80 percent). 12

Compare that to the checking accounts offered by the Nation’s banks and credit unions, where overdraft penalty fees are ubiquitous, median charges are $25 per 

overdraft for credit unions or $35 for banks, and customers can typically be charged 

four such fees per day. 13

A 2012 Pew survey showed that a strong majority of checking account holders nationwide feel that such overdraft programs are more harmful than helpful, and 75 

percent of checking account customers said they would rather have a transaction declined than incur a $35 overdraft fee. New opt-in disclosures mandated in 2010 by 

the Federal Reserve have not resolved this situation: More than half of those who 

overdrafted since that time did not believe that they had opted in. 14

Together, these findings show that when consumers choose prepaid cards, they 

are often seeking—and are generally finding—shelter from the risk of overdraft and 

overspending. Unfortunately, these benefits of prepaid cards may not last. Prepaid 

card providers typically retain the contractual right to change terms at any time for 

any reason, and there is little or no regulatory protection against overdraft or linked 

lines of credit. The CFPB should prevent overdraft and linked or automated lines 

of credit from proliferating in this market as a way of preserving the ‘‘prepaid’’ nature of the product and helping preserve the control mechanism that has drawn consumers to adopt it. 15

Prepaid Card Users Do Not Want the Product To Have Overdraft or Linked Credit 

Prepaid users want their cards to remain free of overdraft and automated or 

linked credit features. One driver of this sentiment is past experience. As noted 

35 

16The Pew Charitable Trusts, ‘‘Why Americans Use Prepaid Cards’’ (2014), 8. 17 Ibid, 14. 18 Ibid., 21. 19Though prepaid cards generally have a version of deposit insurance and liability limits for 

unauthorized transactions, they are generally inferior to those on bank checking accounts— 

something policy makers should address. The Pew Charitable Trusts, ‘‘Consumers Continue To 

Load Up on Prepaid Cards’’ (2014). 20http://www.consumerfinance.gov/newsroom/consumer-financial-protection-bureau-considers-rules-on-prepaid-cards/ 

above, the vast majority of prepaid card users have or used to have a bank account. 

Of these, 41 percent have closed or lost a checking account because of overdraft 

fees. 16 Thus, it is not surprising that 63 percent of prepaid users cite ‘‘avoiding 

overdraft fees’’ as a reason for using the card, with similar majorities saying they 

use the card for ‘‘avoiding credit card debt,’’ and ‘‘helping you not spend more money 

than you actually have.’’ 17

Prepaid card users view mechanisms that would allow them to spend more money 

than they have as self-defeating. They find credit options tempting, and got a prepaid card to help them avoid the risk of overspending and overdraft fees. Altogether, 

71 percent of prepaid users say they would not like to have the ability to overdraft 

their card balance for a fee, with 69 percent rejecting linked payday loans and 63 

percent rejecting linked lines of credit. As one prepaid card user said in a Pew focus 

group, with credit features ‘‘it will turn into a credit card, and it will not be a prepaid card anymore. It will lose its meaning.’’ 18

Lessons From Prepaid 

The case of prepaid cards demonstrates that there is a large and rapidly growing 

market for nonbank transaction accounts. Most prepaid cards offer the functionality 

of a checking account (direct deposit, ATM access, and in most cases electronic bill 

pay) 19 with one key distinction: no overdraft or ability to spend more than they 

have deposited. The fact that the majority of prepaid users also have a checking account strongly suggests that they are looking for services or features that banks are 

not providing. The strength of consumer opinion in favor of more control, and 

against overdraft and overspending, tells us what many consumers are looking for 

when they go outside the bank system. Yet bank checking accounts continue to 

place overdraft as a core product feature. 

Looking forward, efforts to increase access to beneficial banking services must 

take these findings into account. Efforts that help consumers meet the goal of avoiding overdrafting and overspending will be more likely to succeed; efforts that do not 

take this goal into account or put consumers at risk will be more likely to fail. In 

May of 2012, the CFPB issued an Advance Notice of Proposed Rulemaking for the 

prepaid card market. In the announcement, CFPB director Richard Cordray noted 

that, while prepaid cards serve some of the most vulnerable among us, the cards 

also have far fewer regulatory protections than bank accounts or debit or credit 

cards. 20 When the CFPB takes the next step of proposing actual rules, it should 

ensure that overdraft and automated or linked lines of credit are firmly prohibited 

and do not spread into the prepaid card market. 

In conclusion, I would like to thank you for allowing Pew to take part in this discussion. We especially hope that Congress will use its influence to help the Consumer Financial Protection Bureau to achieve its mission of enacting a strong, 

broad, fair, and principles-based regulatory policy for the small-dollar loan market. 

A summary of Pew’s recommendations for small-dollar loan rules is attached and 

detailed information is available at www.pewtrusts.org/small-loans. My colleagues 

at The Pew Charitable Trusts and I would welcome the opportunity for further conversations at any time. 

36 

37 

38 

39 

40 

41 

42 

43 

PREPARED STATEMENT OF DAVID ROTHSTEIN 

DIRECTOR, RESOURCE DEVELOPMENT AND PUBLIC AFFAIRS, NEIGHBORHOOD HOUSING

SERVICES OF GREATER CLEVELAND

MARCH 26, 2014 

Senator Brown and Ranking Member Toomey, my name is David Rothstein, director of public affairs for Neighborhood Housing Services of Greater Cleveland and research fellow in the asset building program with the New America Foundation. I 

appreciate the opportunity to testify before you today regarding small dollar lending, most commonly referred to as payday lending. For more than 10 years I have 

researched small dollar lending and financial services to low-income families. 

Outlined in this testimony I hope to convey the importance of strong regulation 

around small dollar lending, particularly from the Federal Government, as local authorities wrestle to ensure consumers receive safe and affordable loan products. It 

is imperative that we look at the characteristics of the loan such as the APR interest rate and method of payback to assess the quality of the product. 

First, the traditional payday loan model in Ohio and alive in dozens of other 

States does not serve families well. Research of actual borrowers continues tell this 

story in numerous ways—the latest Pew Charitable Trust Research and day old report by the CFPB providing the most startling research to date. I say that it doesn’t 

serve them well because the average family takes out 8 to 12 loans per year from 

one lender, typically purchasing loans in back-to-back transactions. This is absolutely the typical Ohio customer. This means as soon as their loan is repaid, they 

immediately reborrow to cover other expenses. This is also the prototypical debt 

cycle. Our housing and financial capabilities counselors indicate that most clients 

have loans from about four different stores. Keep in mind that many families cannot 

afford to pay back the principle balance of the loan in just two weeks let alone interest and principle. If payback does occur, other monthly budget items suffer such as 

rent, utilities, food, and car payments. 

Second, payday lenders in Ohio morphed into auto title and installment lenders. 

This is also quite typical. And also more expensive. Ohio’s battle to reform and better regulate payday lending continues marking an almost 8 year conflict. In 2008, 

the Ohio General Assembly passed a bipartisan bill to curtail the interest rate, loan 

amount, and number of loans per year in Ohio. The law requires lenders to not sell 

more than four loans per person per year and not more than 28 percent APR interest. The reduction is significant since lenders charge 391 percent APR interest. The 

day after Governor Strickland signed the legislation, payday lenders and their trade 

association announced that they would go to the ballot, to the voter, and try to reverse the law. Despite spending at minimum $10 million, they suffered a wide-margined defeat with voters. Yet, not a single payday lender in Ohio uses the law 

(Small Loan Act) but rather two antiquated mortgage lending laws to sell loans at 

essentially the same price, if not more, than before. 

Most recently, lending in Ohio expanded to include selling high cost loans using 

automobile titles as collateral. An auto title loan is more dangerous than a payday 

loan in the sense that people can and do lose their car once they are too far into 

debt. I have included a 3-part story from the Akron Beacon Journal about a working 

mother of three who lost her car and nearly her home after this loan. Installment 

loans, the newest payday product, offered by payday lenders carry a similar tripledigit interest rate and use the Credit Service Organization law to sell loans for up 

to 12 months. One loan that I analyzed cost a borrower $5,000 to borrow $2,000 

over a 12-month period. 

Finally, At NHS of Greater Cleveland, we practice what we preach. Since we advocate smart home ownership, we purchased our building in the recovering area of 

Slavic Village. Since we are notably critical of payday lending, we are developing 

two alternatives. Working with the innovative start-up company Employee Loan Solutions, we will be working with large employers to provide access to safe, underwritten, low-cost loans through their paycheck. The lender is a CDFI focused on providing low-income families with affordable financial products. The other program is 

a small dollar loan serviced and managed by NHS of Greater Cleveland. The intent 

is to comply with Ohio’s payday lending law, the only group in Ohio to do so. 

As this Congress and the Consumer Financial Protection Bureau consider rules 

and regulations around small dollar lending, a floor on small dollar loans will encourage high-quality innovation. 

Lenders should be required to fully assess a borrower’s ability to repay a loan, 

in full and on time, without the use of repeatedly cashing a check or electronically 

debiting an account. Just like mortgages or credit cards, ability to repay requirements protect borrowers from unsustainable debt. But when lenders have the ability 

44 

to collect payments using postdated checks or electronic transfers, they know they 

will get paid even if it causes financial hardship or forces a borrower to take out 

another loan to pay off the first. Lenders should not be able to use postdated checks 

and electronic payments to access a borrower’s bank account if they are unable to 

repay a loan. The litmus test is that automatic payment should be a convenience 

for the borrower not a side-step to debt collection laws. 

I appreciate your time and commitment to ensuring that low- and moderate-income families are best served in the financial sector. I am happy to answer any 

questions that you may have. 

45 

46 

47 

PREPARED STATEMENT OF NATHALIE MARTIN 

FREDERICK M. HART CHAIR IN CONSUMER AND CLINICAL LAW, UNIVERSITY OF NEW

MEXICO SCHOOL OF LAW

MARCH 26, 2014 

Thank you, Chairman and Members of the Subcommittee for the opportunity to 

provide this written testimony in connection with the hearing entitled ‘‘Are Alternative Financial Products Serving Consumers?’’ Below I provide a background of my 

credentials, describe some of my research on high-cost credit, describe the different 

forms of high-cost credit, and then explain why I believe that enacting a Federal 

usury cap is the simplest and most effective way to regulate these forms of credit. 

I. Background 

My Credentials and Research 

I am the Frederick M. Hart Chair in Consumer and Clinical Law University of 

New Mexico School of Law. This endowed chair is thought to be the only one in the 

U.S. dedicated to consumer law issues. Although I write in other areas as well, the 

primary focus of my research is high-cost loan products (which include payday 

loans, title loans, and triple and quadruple-digit interest rate installment loans), 

and public attitudes about these forms of credit. 

My research on high-cost lending includes the articles listed below, which can be 

found at http://papers.ssrn.com/sol3/cfldev/AbsByAuth.cfm?perlid=1313797. 

‘‘Interest Rate Caps, State Legislation, and Public Opinion: Does the law Reflect the 

Public’s Desires?’’ 89 Chicago Kent L. Rev. 1 (2013) (with Timothy Goldsmith). 

‘‘High-Interest Loans and Class: Do Payday and Title Loans Really Serve the Middle 

Classes?’’, 24 Loyola Consumer L. Rev. 524 (2012) (with Ernesto Longa). 

‘‘The Alliance Between Payday Lenders and Tribes: Are Both Tribal Sovereignty and 

Consumer Protection at Risk?’’, 69 Wash & Lee L. Rev. 751 (2012) (with Joshua 

Schwartz). 

‘‘Grand Theft Auto Loans: Repossession and Demographic Realities in Title Lending’’, 77 Missouri Law Rev. 41 (2012) (with Ozymandias Adams). 

‘‘Regulating Payday Loans: Why This Should Make the CFPB’S Short List’’, 2 Harv. 

Bus. L. Rev. Online 44 (2011), available at: http://www.hblr.org/?p=1595. 

‘‘1,000 Percent Interest—Good While Supplies Last: A Study of Payday Loan Practices and Solutions’’, 52 Arizona Law Review 563 (2010). 

‘‘Double Down-and-Out: The Connection Between Payday Loans and Bankruptcy’’, 

39 Southwestern L. Rev. 789 (2010) (with Koo Im Tong). 

My Research Progression and Empirical Findings 

I have done five empirical studies related to high-cost lending and attitudes toward high-cost lending. 

First Study in 2009 

I devised my first study, ‘‘1,000 Percent Interest—Good While Supplies Last: A 

Study of Payday Loan Practices and Solutions’’, after meeting clients in our clinical 

law program that had taken out the loans. Before meeting these clients, I had no 

idea what the terms of these loans actually were. Once I saw the 1,000 percent interest rates, I had to learn more. As a person who believes markets can serve people 

and respond to competition and consumer complaints, I wanted to find out why the 

rates never seemed to drop even when more lenders entered the market. I also 

wanted to find out what people were using the loans for and whether consumers 

shopped based upon the rates. Finally, I wanted to determine if consumers knew 

the loans were interest-only loans when they took them out. I went into the study 

with an open mind, just trying to learn the facts. In the study, published in the Arizona Law Review, I and my students interviewed 109 consumers outside payday 

lending stores. Key findings of this study include: 

People Do Not Shop for Payday Loans on the Price So the Market Does Not Reduce 

Cost 

People do not shop for price when obtaining a payday loan but instead take out 

loans near home or work out of convenience, or go to lenders that friends or family 

members have used. This means that the market forces that would usually reduce 

prices through competition do not work. Indeed, regardless of how many new lenders enter the market, prices only go up, never down. 

Most Customers Do Not Understand the Loans Before They Get Into Them 

People have difficulty understanding the terms of the loans and are very surprised when they go in and make a payment of $80 on a $400 loan and the $80 

48 

1 ‘‘Double Down-and-Out: The Connection Between Payday Loans and Bankruptcy’’, 39 Southwestern L. Rev. 789 (2010) (with Koo Im Tong). 2 ‘‘Grand Theft Auto Loans: Repossession and Demographic Realities in Title Lending’’, 77 

Missouri Law Rev. 41 (2012) (with Ozymandias Adams ). 3 ‘‘High-Interest Loans and Class: Do Payday and Title Loans Really Serve the Middle Classes’’, 24 Loyola Consumer L. Rev. 524 (2012) (with Ernesto Longa). 

payment does not reduce the principle on the loan at all. People also cannot calculate the annual percentage rate on the loan (for example, by multiplying the 14 

day rate by 26 periods of 14 days within a year), and thus cannot easily compare 

the cost of this credit to other forms of credit. 

Some people thought that a rate of $15 per $100 borrowed for 14 days (390 percent per annum) was less expensive than a credit card rate of 25 percent per 

annum. One woman was proud of herself for using these loans instead of student 

loans. 

Customers’ Use of the Loans 

People do not use the loans for short term needs. Many people who use these are 

in continuous debt, often with more than one loan. 

Many people reported having low cost or no cost options to taking out the loan, 

including doing without or asking a friend or family member. Getting the high-cost 

loan just seemed easier, until they saw how hard it was to pay back. 

People generally are not able to pay the loans back as quickly as they thought 

they would. 

People use the loans primarily for regular monthly expenses, not emergencies, 

which means these consumers are worse off the following month than they were before they took out the loan. They now have another monthly bill to pay. 

Subsequent Empirical Research 

Before I began the first study, I had no idea how many loans consumers carried 

at a time. I assumed most people used just one loan at a time. Discovering the use 

of multiple loans at a time led to my next study, an empirical analysis of the debts 

of over 1,000 bankruptcy debtors to determine what percentage of the debtors used 

payday loans in a State with lax regulations, and of those, how many loans the borrowers had. I discovered that 19 percent of debtors in the study used the loans, that 

nearly 70 percent of those with loans had more than one, that 37 percent had more 

than 5 loans, and that an astounding 14 percent had more than 10 loans. 1

In my next study, I analyzed State data on title loans and discovered, among 

other things that title lenders do not underwrite the loans for affordability and that 

the loans create a high risk of repossession. 2 I then did a demographic study of borrowers, again using bankruptcy data, and discovered that most payday loan borrowers are not middle class people as the industry suggests but that these borrowers typically have lower incomes than the median income in their State and also 

have lower home ownership rates than the average. 3 These results have been recreated in numerous studies, including ‘‘Do Payday Loans Really Serve the American 

Middle Class? An Empirical Analysis’’, in a recent issue of the Journal of Consumer 

Affairs. 

II. Background of Topic: Terms of Various Types of High-Cost Loans 

There are many varieties of high-cost loans, a few of which are described here as 

background. 

Payday Loans 

A true ‘‘payday’’ loan is called a payday loan because its original purpose was to 

help a customer survive a short-term cash flow crisis between the time of the loan 

and the customer’s next payday. In one common form of payday loan, a consumer 

borrows money at a rate of between $15 and $25 per $100 for a period of 14 days 

or less. In other words, if a consumer was paid 4 days ago but is already out of 

cash, she can go borrow, for example, $400 between now and her next payday (now 

10 days away). To get that $400 at the $15 per $100 rate she would need a checking 

account and would write a check, or authorize an automatic debit, for $460 

postdated to her next payday. 

When payday comes, she can either let the check or debit clear, assuming the unlikely event that she now has this money, or she can go in and pay another $60 

to borrow the same $400 for the next 2 weeks. When taken as an annual percentage 

rate, calculated by multiplying this rate by twenty-six 2-week periods over the 

course of a year, these terms result in an interest rate of 390 percent per annum 

or higher. 

49 

4Marquette Nat’l Bank v. First Omaha Serv. Corp., 439 U.S. 299 (1978). 

Typical State payday loan laws (in States that have them) limit interest and fees to $15 per $100 (390 percent or more) but only if the loan is 14–35 days in duration. 

These laws do not apply to longer loans. 

Title Loans 

Another type of high-cost loan is the auto title loan, for which consumers do not 

need bank accounts. Rather borrowers simply need an unencumbered automobile to 

secure the loan. These loans carry a typical interest rate of 25 percent per month 

or 300 percent per annum. While title loans typically carry lower interest rates than 

payday loans, they tend to be larger loans, increasing the chances that they will be 

difficult to repay and will create a debt trap. They also subject borrowers to the possibility of losing their vehicle, a risk not encountered with the other forms of highcost loans. 

Installment Loans 

Yet another type of high-cost loan is the so called ‘‘installment loan.’’ This is the 

new loan of choice for many lenders as these loans allow lenders to skirt State laws 

regulating loans made for 14 to 35 days. 

The phenomenon of morphing loans into another form in order to avoid State laws 

is discussed in more detail below, but in short, lenders make installment loans to 

avoid State payday loan laws, simply by making loans with durations longer than 

35 days. Longer loans fall outside the regulations and thus remain unregulated. In 

one such installment loan, a customer borrowed $100, to be repaid in twenty-six biweekly installments of $40.16 each, plus a final installment of $55.34. In total, this 

borrower paid a total of $1,099.71 on a $100 loan. The annual percentage rate on 

the loan was 1,147 percent. 

III. Solutions to the Problems Caused by High-Cost Loans 

There are many ways to legislate high-cost credit, but most methods that have 

been tried have failed. One method that has not failed is simply capping interest 

rates. Other possible solutions may exist, but each has its problems. For example, 

a law could be passed that would require that lender underwrite their loans. Lenders would need to ensure that borrowers could afford to make their regular monthly 

expenses and also pay back the loan. Otherwise, the loan could not be made. If the 

loan was made anyway, it would not be enforceable. 

Another middle ground would be forbidding rollovers or back to back loans from 

the same lender or different lenders, and limiting the number of loans a consumer 

could take out in a given time frame. This could be enforced through a national 

database in which all loans would need to be placed. A well written law would provide that if a loan did not appear in the database, it would not be enforceable and 

the lender could not take any action to collect it. 

Lenders dislike these options, claiming that the latter violates consumer privacy 

rights and that the former, the underwriting, is too complex. I agree that these options are complex. I also fear that lenders would find ways around compliance, similar to the loopholes they have used in the past. Because of these potential loopholes 

and also these complexities, I prefer a far simpler method of regulation, namely the 

implementation of a Federal usury cap. 

A. There Is No Existing Federal Law on Interest Rate Caps for Loans to the General 

Public 

There currently is no Federal law regulating interest rates on consumer loans. 

Until 25 years ago, most U.S. States had usury laws that capped interests on consumer loans. In the U.S., usury laws have historically been the main protection consumers have had against harsh credit practices. Usury dates back to the earliest 

recorded civilizations and has a very prominent role in early American laws. 

The Supreme Court’s decision in Marquette National Bank v. First Omaha Service Corp., 4 concluded that the bank’s State interest rate applied when a bank lent 

to an out-of-State customer, and after this decision, States began eliminating their 

usury caps in order to attract financial institutions to their States, with South Dakota and Delaware leading the way. The decision effectively deregulated State interest rate caps. No Federal law has filled this gap, nor have other solutions to highcost lending been designed. 

B. Only About a Third of States Effectively Regulate High-Cost Credit 

Eighteen States plus the District of Columbia either forbid high-cost lending or 

cap interest rates at 36 percent or less. The rest of the States have either no regulation of consumer loans, have regulations that affirmatively allow the high-cost prodVerDate Nov 24 2008 10:55 Dec 19, 2014 Jkt 046629 PO 00000 Frm 00053 Fmt 6621 Sfmt 6621 L:\HEARINGS 2014\03-26 ARE ALTERNATIVE FINANCIAL PRODUCTS SERVING CONSU
50 

ucts described above, or have piecemeal laws that apply to one or more of the various types of loans. The resulting legislative patchwork has kept legislatures and 

consumer protections organizations busy around the clock, but has not resulted in 

any overall decrease in high-cost loans or in interest rates on such loans. To the 

contrary, the high-cost lending industry is growing exponentially, faster than any 

other part of the consumer credit sector and rates are going up not down. 

C. The Public Supports Interest Rate Caps on Consumer Loans, Even the Very Conservative Public 

In every study or survey in which the public has been asked to comment, the 

American public overwhelmingly supports Government imposition of interest rate 

caps on consumer loans. A recent study I did with psychologist Tim Goldsmith 

proves this point. Our entire article is attached but other studies and survey all 

reach the same result. 

First, a national survey by the Center for Responsible Lending shows that three 

out of four Americans who expressed an opinion think that Congress should cap interest rates, and 72 percent feel that the caps should be no higher than 36 percent. 

State ballot initiatives glean the same results. For example, in Montana, 72 percent of the population supported a ballot initiative that ultimately resulted in a 36 

percent cap on interest rates for all loans in Montana. Citizens of Kentucky also 

voted for a ballot initiative that ultimately capped all loans at 36 percent. Similarly, 

Arizonans overwhelmingly supported a ballot initiative that ended payday lending 

in the State. Additionally, in 2008, 68 percent of Ohioans supported a ballot initiative that purported to cap interest in the State at 28 percent. 

Public opinion survey data show similar public proclivities in favor of interest rate 

caps. After hearing that payday and title lenders can charge 500 percent or more 

in Texas, 63 percent of Texans age 45 or older strongly agreed that the State should 

cap interest rates and fees, with 77 percent of respondents reporting that the cap 

should be 36 percent or less. In another survey taken by the Texas Fair Lending 

Alliance, and the Texas Faith for Fair Lending, 85 percent of people polled favored 

capping interest rates on payday and auto title loans at 36 percent APR or less. In 

Iowa, survey data showed that seven in ten Iowans believe payday loan rates and 

fees should be capped. In Rhode Island, the only State in New England to allow 

storefront payday lending, a public opinion poll showed that 62 percent of Rhode 

Islanders supported capping interest on payday loans. Finally, a public poll of Coloradans showed that 74 percent of Coloradans support a similar 36 percent cap. 

Additionally, support for caps crosses party lines. In the attached study by Professor Tim Goldsmith and I, we set out to measure not just overall support for interest rate caps but political affiliation of those who favor caps on consumer loans. Our 

data show widespread support for interest rate caps across political lines. We did 

find that more Democrats favor interest rate caps than Republicans, with 94 percent 

of Democrats favoring caps and 73 percent of Republicans favoring caps. 

What is remarkable, however, is just how many conservative people favor caps. 

Our data show that over 57 percent of people who report being ‘‘very conservative’’ 

politically and over 82 percent of those who report being ‘‘conservative’’ politically 

favor interest rate caps over no interest rate caps. 

While wondering aloud why the public is not more active in seeking out laws that 

cap interest, we stumbled upon a possible explanation. First, many people incorrectly think interest rates are capped (over 58 percent for credit cards and over 43 

percent for short-term loans), when in reality these rates are not capped. In other 

words, people misunderstand and overestimate the protection the law currently provides. Second, even among those who know that the law provides no caps, most are 

unaware that lenders in the State in which the study was conducted currently 

charge interest rates of 200 percent or more. Indeed, we found that 81 percent of 

the public was unaware of the costs of these ubiquitous loans. These poll data support the notion that 300 percent to 1,000 percent loans are not normal or usual, and 

the public opposes them. Interestingly, people who had themselves used the loans 

were even more in favor of caps than nonusers. 

D. Loopholes: How Lenders Get Around Every State Law That Is Passed, Except 

Caps 

Despite wide and deep public support for rate caps, uniform State interest rate 

caps that apply to all consumer loan products are few and far between. Moreover, 

those caps that do exist are often ineffective due to State laws’ inability to regulate 

certain lenders, namely online lenders located offshore or affiliated with Indian 

tribes. 

In States where complex statutes are passed to limit high-interest lending, even 

storefront lenders find ways around those laws, by changing the attributes of the 

51 

5 Robert Mayer, ‘‘One Payday, Many Payday Loans: Short-Term Lending Abuse in Milwaukee 

County’’ (working paper, 8), available at http://lwvmilwaukee.org/mayer21.pdf (last accessed 

Aug. 6, 2009). 

loans to avoid the laws, fitting within exceptions created by other laws on the books, 

or becoming credit service organizations (CSOs), which are exempt from the laws. 

This complex game of whack-a-mole makes regulating State by State an expensive 

yet ineffective endeavor. 

1. The ‘‘Loan Term’’ Loophole 

Loopholes happen. In the world of payday lending, they happen a lot. For example, payday lenders began appearing in New Mexico after the State repealed its 

General Usury statute (former NMSA 1978 §56-8-11-1) in 1991. For five very long 

and frustrating years, the New Mexico Legislature debated various payday lending 

statutes. Finally, during the legislative session of 2007, the Legislature adopted a 

law is similar to those of several other States. The regulation relies heavily on computer database enforcement mechanism for consumer qualification and reporting. 

Thirty-three States have laws that bear some similarity to this New Mexico law. 

None, however, curb high-cost lending abuses, despite legislative goals of curbing 

high-cost loan abuses. The new law capped interest and fees at $15 per $100 for each period of 14 days 

or less, or 390 percent per annum or more. The new law also applied only to lenders 

engaged in the business of lending amounts of $2,500.00 or less, and defined a loan 

covered by the Act as one of 14 to 35 days in duration, for which the consumer gives 

the lender a check or debit authorization for the amount of the loan plus interest 

and fees. 

In the end, this narrow definition gutted the legislation. The industry quickly 

switched to loan products that fall outside the statute, namely longer loans or those 

not involving a postdated check. This was done so that lenders could charge more 

than 390 percent per annum and avoid the database. Naturally, these loans that 

fall outside the definition are not regulated at all. Thus, many States have spent 

years attempting to regulate payday lending, but the resulting State laws have done 

nothing to change short-term lending at high interest rates. 

Professor Robert Mayer reports on a similar legislative process in Illinois: 

Regulators in Illinois imposed rules in 2001 that were designed to [curb the 

number of payday loans and roll-overs]. Customers were allowed to borrow 

no more than $400; only two renewals were permitted, with some of the 

principal paid down each time; and a cooling-off period was mandated to 

prevent borrowers from using the proceeds of a new loan to pay off the old 

one. The State . . . promised to establish a database to track loan activity 

and enforce the rules. 5

As in New Mexico, Illinois payday lenders quickly devised a new product to evade 

the rules. The statute applied to cash advances with a term of less than 31 days, 

so the industry created a 31-day loan not covered by the rules. As a result, all of 

the old abuses persisted. 

A 2003 Illinois OFI report acknowledged that it remains quite common for borrowers to have multiple payday loans outstanding with several different payday 

loan companies. Similar end runs occurred in Oklahoma. Additionally, other States 

such as Florida, Illinois, and Michigan have tried to impose interest-free payment 

plans like one passed in New Mexico, but these laws have produced no meaningful 

reduction in the number of trapped borrowers. 

2. Using Exceptions Created by Other Laws To Get Around State High-Cost 

Loan Laws 

Other forms of loopholes also abound. In 2008, the Ohio State Legislature voted 

to rescind a 12-year-old law that exempted payday lenders from the State’s usury 

laws, a vote Ohioans supported two to one. An existing short-term loan law purported to cap interest on all short-term loans at 28 percent, and also to give customers at least a month to pay off the loans. In response, lenders simply switched 

their licenses so they could offer payday loan look-alikes under two parallel lending 

statutes, the Small Loan Act or the Mortgage Lending Act. Making these changes 

was simple for lenders and they began offering even higher cost loans, as this industry Web site explains: 

By adjusting the loan amount to just above $500, payday loan lenders double the loan origination fees from $15 to $30. The Small Loan and Mortgage 

Lending acts allow the fees on top of the 28 percent interest, something the 

new payday lending law doesn’t permit. Under the new HB 545 licensing 

52 

6 As another industry Web page explains: With news of the passage of Issue 5 in Ohio on 

Nov. 4, Check Into Cash began restructuring its loan product offerings throughout the Buckeye 

State to comply with the new law. On Nov. 5, the company ceased to offer payday loans and 

began offering a new product, microloans, which are short-term loans from $50 to $600 and permitted under Ohio’s Small Loan Act. These new microloans are one way that Check Into Cash 

is striving to continue to serve its valued customers with the same level of service as it has 

in prior years. Even though this new Ohio legislation was designed to make it difficult to continue serving customers who desire payday advance services, Check Into Cash has pushed 

ahead, endeavoring to persevere with its ongoing commitment to customer service. ‘‘Check Into 

Cash Committed to Serving Ohio Customers’’, PRWEB (Nov. 18, 2008, 10:19 AM), http:// 

www.prweb.com/releases/checkintocash/ohio/prweb1628414.htm), quoted in Martin, supra note 

43, at 591 n. 151. 7 ‘‘The Connection Between Indian Tribes and Payday Lending’’, Online Cash Advance, 

http://www.online-cash-advance.com/financial-news/the-connection-between-indian-tribes-andpayday-lending#ixzz1Nt1vQu6h (last accessed Jan. 11, 2012) (on file with the author). 

scheme with the check cashing fees added, customers pay the same $575 

to walk out the door with $500 in cash . . . 

A First American payday loan customer indicated he previously paid $75 

for a $500 loan, First American charged him a total of $90 to borrow the 

same amount after the law changed. More than one Ohio payday loan company has structured their check cashing and loan operations as two separate entities to justify the fees. 6

Then Ohio Attorney General Rich Cordray said his office found payday loans with 

APR’s ranging from 128 to 700 percent immediately after the ballot initiative that 

purported to cap interest on consumer loans in Ohio at 28 percent. 

3. Online Lending 

Internet payday lending is growing quickly and many online lenders claim to be 

immune from State laws. Even where States have won cases holding that online 

lenders must comply with State laws, lenders often fail to do so. State regulators 

have again garnered precious resources to enforce their laws, often to no avail. The 

most recent survey by the Consumer Federation of America (CFA) notes that lenders continue to claim choice of law from lax jurisdictions, to locate off-shore, or to 

claim tribal sovereign immunity to avoid complying with State consumer protection 

laws. 

The trial sovereign immunity loophole is particularly troubling, as it pits two traditionally disadvantaged groups, Native Americans and low-income consumers, 

against one another in a complex battle over who needs protection more. Under this 

model, lenders team up with Indian tribes to avoid State laws. Tribes engaged in 

off-reservation activities must comply with nondiscriminatory State laws, as must 

anybody else. Despite this requirement, tribes are immune from suit because they 

are separate sovereigns. Thus, while they must obey State laws, they can’t be sued 

to enforce the laws or compel their compliance. This motivates lenders to seek out 

tribal partners as this industry Web site explains: 

Due to the strict regulations that are hitting the payday loan industry hard, 

many lenders are now turning to Indian Tribes to help them out. The 

American Indian Tribes throughout the United States have been granted 

sovereign immunity which means that they are not held subject to the laws 

that payday loans are currently going up against. There are 12 States 

which have banned payday lending but as long as their (sic) is an Indian 

tribe who runs the operation on this sovereign land, the lenders can continue their business even where payday loans have already been banned. 

Similar to the Casino boom, payday loans are the new financial strategy 

that many are using as a loophole through the strict payday loan laws. The 

revenue is quite high and promising for these tribes who often find themselves struggling. There are approximately 35 online cash advance and payday loan companies that are owned by American Indian tribes. . . . It is 

no surprise that many lending companies are currently seeking out American Indian Tribes in an effort to save their businesses by escaping U.S. 

lending laws. Tribal leaders are paid a few thousand dollars a month for 

allowing a payday lender to incorporate on tribal land. The more lenders 

that tribes allow to move onto their reservation, the larger the profit that 

they make. 7

Often, as this excerpt clearly articulates, the lenders using this model are not 

tribes. Proving that the lenders are not entitled to tribal sovereign immunity is not 

easy, however. A simple Federal interest rate cap would eliminate this loophole as 

even tribes are bound by Federal law. 

53 

8Susan K. Urahn, Travis Plunkett, Nick Bourke, Alex Horowitz, Walter Lake, and Tara 

Roche, ‘‘Payday Lending in America: Policy Solutions, Report 3 in the Payday Lending in America Series’’, The Pew Charitable Trusts, October 2013, 12–13, http://www.pewstates.org/ 

uploadedFiles/PCSlAssets/2013/PewlPaydaylPolicylSolutionslOctl2013.pdf. 9 10 U.S.C. §987(b) and 32 CFR §232.4(b). 

E. Colorado: A Middle Ground To Consider But Still 200 percent 

Despite all of the failures of State high-cost lending laws to reduce interest rates 

or otherwise eradicate onerous loan terms, Colorado has passed a law that does 

lower those rates somewhat. This law is worth studying for its possible implications 

for future Federal legislation. 

Colorado’s 2010 law has reduced the number of payday loans in the State as well 

as the interest rates on existing payday loans. The law sets a maximum loan 

amount at $500 and adds provisions designed to keep consumers from getting 

trapped in the usual payday loan roll-over cycle. Consumers also have the right to 

cancel a payday loan transaction by 5:00 p.m. the following day. Consumers may 

also choose to repay loans in one sum or pay the full amount over 6 months. The 

law also caps interest rates for these loans at 45 percent, but this rate limit does 

not include fees and other costs, which add significantly to the actual cost of the 

loans. 

A recent study completed by the Pew Charitable Trust concludes that this new 

law has been effective in reducing rates on payday loans. 8 The dollar amounts of 

payday loans in Colorado have fallen almost 60 percent, and the number of loans 

fell from 1,110,224 loans in 2010 to 444,333 in 2011 after the law was implemented. 

Data from the Colorado Attorney General’s office indicate that the new law appears 

to have dropped average effective APRs from 338.90 percent to 191.54 percent. In 

addition, quite significantly, the average number of payday loans consumers have 

taken out per year has fallen from 8.53 loans per person to 2.3 loans per person. 

Nonetheless, the average contract finance charge has risen significantly, from $60 

to $237 and many consumer protection groups are appalled that when fees and costs 

are included, the Colorado law allows interest rates of nearly 200 percent. There 

also has been an increase in ‘‘same-day-as-payoff’’ transactions, meaning the lender 

makes a new loan to a consumer on the same day the consumer pays their previous 

loan in full. This means lenders are easily getting around rollover limits. 

In summary, Colorado has been more vigilant than any other State in working 

on a solution to the payday lending problem. The law it passed, while better than 

most, still has problems. 

Few States have the will or the resources to go to the efforts to which Colorado 

has, making a Federal solution to the problem efficient and effective by comparison. 

Congress has regularly and effectively taken over areas of consumer and commercial 

law and should do so here as well. Nevertheless, Colorado’s law should be studied 

by Congress before it acts. 

F. Why a Federal Interest Rate Cap Would Work Best 

Given the overall failure of States, a Federal usury cap is the only option that 

is certain to curb high-cost lending. Coordinating 50 States on this or any issue is 

complex and difficult work. Congress on the other hand need pass just one law to 

accomplish a national usury cap. Consumers can and do cross borders to borrow 

money, and States have no particular interest in caps. Moreover, the entire country 

is a common market, such that any State’s regulation of interest rates inherently 

reaches across borders. Thus, there is a need for uniformity on interest rates across 

those borders, which only Congress can provide. 

Congress unquestionably has the power to set Federal interest rate caps, through 

the Commerce Clause of the U.S. Constitution. Indeed, in recent years the regulation of consumer credit has become even more and more of a Federal, rather than 

a State, regime. 

G. The Military Lending Act as a Starting Point for Congress 

Congress already has experience setting a 36 percent cap that protects some but 

not all Americans. In 2007, Congress passed the Military Lending Act (MLA), 9

which purported to place a 36 percent interest rate cap on consumer loans and to 

prohibit lenders from engaging in predatory practices toward active-duty military 

members and their dependent family members. 

In passing the MLA, military lenders were deeply concerned about the effects of 

predatory lending on military readiness. When they realized State lawmakers were 

unable or unwilling to pass laws protecting the troops, these leaders focused their 

efforts on passing Federal legislation. In 2006, the United States Department of Defense issued a report finding ‘‘that payday lending ‘harms the morale of troops and 

54 

their families, and adds to the cost of fielding an all-volunteer fighting force.’ ’’ Congress noted that lenders were blatantly targeting the military by clustering in large 

numbers ‘‘near military bases’’ and using ‘‘military-sounding names’’ and also that 

military personnel lacked sophistication in financial matters and were easily taken 

advantage of. 

While there was early evidence that the MLA curbed predatory lending to military communities, more recent evidence suggests that even the MLA is mired by 

loopholes. However, Congress can learn from these loopholes and pass an effective 

36 percent cap, modeled after effective State law caps. Congress can learn from the 

experience gleaned from the MLA and pass a law that better serves all Americans. 

Finally, the Federal Government has the power to enforce a Federal usury cap 

through the Consumer Financial Protection Bureau, whereas most States lack sufficient enforcement power. 

IV. Conclusion 

Based upon years of research and a great deal of contact with low-income consumers, I honestly believe people are better off without the option to take out unlimited numbers of high-cost loans. This is especially true when current law in most 

States allows lenders to charge 1,000 percent per annum or more in interest and 

fees. These forms of credit cause far more harm than good. They are not safe, not 

affordable, and thus access to them is more of burden than a benefit. 

These loans make cash flow problems worse. The two ways to eradicate cash constriction are to increase income or reduce costs. These loans increase costs and thus 

worsen the problem of limited income to meet expenses. If these loans cannot be 

made more affordable, the loans should not be made. 

Moreover, as long as these forms of credit are around, alternatives for low and 

middle income people with poor credit will not be become available. Where the loans 

are legal, high-cost lenders are everywhere, outnumbering Starbucks, McDonald’s, 

Burger Kings, and Walgreen’s combined. With no underwriting, they are easy (too 

easy) to borrow from. As long as these lenders are in business under the terms described here, it will be difficult for States and the Federal Government to develop 

lower cost alternatives. 

Thanks very much for reading and let me know if you’d like more information on 

any of these points. 

55 

56 

57 

58 

59 

60 

61 

62 

63 

64 

65 

66 

67 

68 

69 

70 

71 

72 

73 

74 

75 

76 

77 

78 

79 

80 

81 

82 

RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN BROWN 

FROM G. MICHAEL FLORES 

Q.1. Regulators have long made clear that the ability to repay 

means repaying a loan without ‘‘loan flipping,’’ i.e., frequent renewals or reborrowing. The Online Lenders Alliance study shows as 

many as 57 percent of customers in some cases were unable to pay 

back the loan without taking out another loan in the same month. 

This study also found that 29 percent of loans were not reported 

as ‘‘paid.’’ 

What do these findings tell us about the sustainability of these 

loans? 

A.1. This 57 percent metric indicates that some customers use the 

product as a monthly cash flow tool and that there are a smaller 

group of customers that are high frequency users and the single 

pay product is not necessarily best suited for their needs. 

The 29 percent metric is indicative of high risk borrowers. These 

may be outstanding loans that have yet to reach their payment 

data of classified as delinquent or charged-off. As such, higher risk 

equates to higher costs. In a commercial banking environment, 3 

percent delinquency is at the upper end of acceptability for consumer loans (see http://www.federalreserve.gov/releases/ 

chargeoff/). 

Q.2. Please describe how these findings may evidence that an ability to pay rule is needed for these types of loans. 

A.2. For short-term, low dollar loans, a better criterion is ‘‘likelihood to repay’’ rather than ‘‘ability to repay.’’ For loans that average $400, underwriting for ability to repay would significantly add 

to the cost and make originating these loans unprofitable. Likelihood to repay measures the history of an individual to honor their 

obligations for low-dollar debts including utility payments, rent, 

etc. 

Q.3. Payday loans are advertised as 14-day or 30-day loans. Lenders market small-dollar credit loans, such as payday loans, as a 

‘‘safe,’’ ‘‘sensible financial choice,’’ and ‘‘the best alternative to meet 

their current needs’’ for a ‘‘one-time fixed fee.’’ 

Pew found that borrowers were on average indebted for 144 days, 

and CFPB found that they were indebted for 199 days. You testified that the Online Lenders Alliance consumer study shows that 

consumers have an average of 70 to 120 days of indebtedness per 

year. 

How do these findings reinforce that the short-term small-dollar 

products are not in fact designed to be repaid according to their 

terms? 

A.3. These products are designed to meet a specific need. My research also finds that the average advance amount has steadily increased since 2009 which indicates a shift in consumer needs. An 

installment or line of credit product may be more suitable to meet 

these shifting needs. As I stated in my testimony, the payday product fits into a continuum of credit products starting with overdrafts 

and progressing in terms of dollar amount, duration, payment 

scheduling, secured, etc. Removing any of these products from the 

continuum creates a gap that the consumer must fill with a less 

83 

than optimal solution. Adding products provides flexibility and 

choice so that the consumer will find solutions that meet their specific requirement or circumstance. 

Q.4. As a witness at the U.S. House of Representatives Subcommittee of Financial Institutions and Consumer Credit hearing 

on access to consumer credit in 2012, you stated that divergent 

States regulations ‘‘deny alternative financial services providers the 

ability to achieve scale thereby reducing costs now associated with 

operating in all 50 States.’’ 

What actions would you recommend the Consumer Financial 

Protection Bureau (CFPB) take to provide a level of uniformity and 

Federal oversight of these products, which would in turn allow industry to scale products nationwide and reduce costs? 

A.4. To my understanding, the CFPB provides consumer protection 

oversight but cannot provide a national platform from which standardized products are authorized to exist. I believe that Congress 

must authorize a national platform. 

In terms of establishing national guidelines, the CFPB could be 

invaluable in going after nonlicensed, off-shore entities that do not 

conform to any State or Federal statutes. 

I believe that a national usury cap of 36 percent would eliminate 

credit to millions of consumers who have credit scores under 550. 

Q.5. The most recent report released by the CFPB shows that 58 

percent of borrowers who take out payday loans on a monthly basis 

are recipients of some kind of benefits—Social Security, SSDI, unemployment—or retirement income. The white paper the CFPB released last year found that 22 percent of all borrowers are on some 

form of public assistance or relying on retirement income. 

Payday is usually advertised as a short-term stopgap to fill a 

consumer’s financial needs until the borrower receives some new 

source of income. This is not the case for borrowers on a fixed income from Government assistance or in retirement. 

How safe are these products for individuals living on fixed incomes? 

A.5. If indeed, there is a timing gap to pay an expense, then the 

short-term advance product is appropriate. 

If the premise is that benefits recipients have or will have no 

other source of income in the future, then that would say we have 

a group of citizens who have a permanent reliance on benefits. I 

would have to disagree in that the median age of payday loan users 

is 39 and that Social Security recipients may only represent a 

small fraction of users. Additionally, Social Security recipients may 

earn other income with no limitation past the age of 66. Also, unemployment benefits presuppose that the consumer will one day be 

employed again. Remember, these loans are a stop gap measure 

and most users are only in the product for approximately 2 years. 

I do not believe that any agency can look into the needs of individuals and State that certain products are inappropriate. That 

said, there must be a variety of products available to meet individual needs as ‘‘one size does NOT fit all!’’ 

Q.6. Should we be concerned that Government benefits payments 

are going to companies that may be taking advantage of borrowers? 

84 

A.6. Actually, many of these benefits are paid by the taxpayers in 

terms of unemployment taxes and contributions throughout their 

lifetimes toward social security. I do not believe that the Government has a role in telling people how to spend income that they 

have paid for throughout their lives. 

Q.7. Payday loan contracts are considered simple in comparison to 

the terms associated with other consumer credit products, such as 

mortgages, credit cards, and other alternative small-dollar loans 

like auto-title and installment loans. However, it is clear that borrowers have trouble understanding and assessing their ability to 

repay since consumers who use these products are in continuous 

debt. 

Can you explain why it is common for borrowers to inaccurately 

predict their ability to repay in full the loan and their likelihood 

for taking out subsequent loans? 

A.7. No, I have not undertaken a behavioral study on this subject. 

Q.8. What type of disclosures would be most useful? 

A.8. I am unsure if the disclosure can be any clearer. If an expanded disclosure is inevitable, then a sample of the average loan 

usage and costs incurred of the loan company’s customer base may 

prove useful. 

Q.9. How would disclosing APRs help borrower assess the actual 

cost of the loan? 

A.9. I have never been a proponent on APR as a useful metric for 

loans less than 1 year in duration. It is the same reasoning that 

overdrafts do not disclose APR’s. The fee for a short-term advance 

is the most easily understood metric a borrower can have. Consider 

the APR for a $100,000, 30-year mortgage, while the APR may 

state 5 percent, the cost of borrowing for the 30-year term is close 

to the original principal amount. Which is more misleading, $45 for 

a $300 advance for 2 weeks with the APR of 320 percent or $93,256 

for a $100,000 mortgage with a 5 percent APR? 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR TOOMEY 

FROM G. MICHAEL FLORES 

Q.1. Do you think most unbanked or underbanked Americans are 

capable of handling their own finances, or do you feel that Government needs to step in and ‘‘protect them from themselves’’ by such 

actions as credit rationing or denying them certain credit products? 

A.1. I believe that there should be sufficient choices for the consumer. Most of these consumers are very capable money managers 

in that they must constantly make choices of how to spend their 

scarce resources. 

Q.2. Some argue that States should not be rationing credit because 

in some cases consumers act irresponsibly and get deeply in debt. 

Do you agree, or do you support Government stepping in and rationing credit? Some also argue that loan prices should be set by 

the free market and should not be subsidized by the Government. 

What do you think about this issue? Should unbanked and underbanked consumers who pose higher credit risks have their loans 

85 

subsidized or be given some type of governmental support, or 

should rates be set through the free market? 

A.2. In any population, there are a small percentage of consumers 

who account for the majority of volume. The Pareto Principle is a 

decision-making technique that statistically separates a limited 

number of input factors as having the greatest impact on an outcome, either desirable or undesirable. Pareto analysis is based on 

the idea that 80 percent of a project’s benefit can be achieved by 

doing 20 percent of the work, or conversely, 80 percent of problems 

are traced to 20 percent of the causes. 

Regardless of the amount of credit that may be authorized or restricted for a consumer, there will still be the Paretian long tail 

distribution. 

The market is the best arbiter in that most artificial factors limiting the market will have unintended consequences. 

Government subsidies are not the ultimate solution, the answer 

is a robust economy with dynamic job creation and upward mobility 

for consumers. 

Q.3. As you undoubtedly know, the Post Office Inspector General’s 

Office has recently proposed that the Post Office be allowed and encouraged to begin offering small loans and other alternative financial services products through partnerships with banks and credit 

unions. Their report claims, for example, that the Post Office could 

offer a $375 loan repayable over 5 to 6 months at a rate of 28 percent APR that would generate a profit of $48 for the Post Office 

(and its banking partners). Do you find the analysis persuasive? 

A.3. This is very dangerous territory for bank in that the Post Office becomes another vendor and must be managed accordingly. 

This is an example of ‘‘rent-a-charter.’’ This could create credit and 

reputational risk for the bank. Also, there has not been a successful 

loan model for small dollar loans that can be profitable at 28 percent. For the past 25 years, I have advised banks that they cannot 

make a profitable loan under $5,000 given their funding, operating, 

credit administration, compliance and credit loss cost structures. 

That is why banks used credit cards, overdrafts and home equity 

loans for consumer loans. 

Consider the funding costs of the loans the bank would carry on 

their books. Then one must consider the operating costs including 

credit administration and compliance the loss ratio of these loan is 

approximately 15 percent. If one looks at the following Federal Reserve data for consumer loan delinquencies (see http:// 

www.federalreserve.gov/releases/chargeoff/delallnsa.htm), it is difficult to imagine the regulatory not having severe heartburn over 

a type of credit that exhibits a delinquency and charge-off rate 

greater than 5 times the banking industry’s average: 

86 

87 

Q.4. The Internet has revolutionized Americans’ buying habits and 

greatly increased their product choices. Consumers today, regardless of where they are located, can obtain essentially whatever commercial product they need when it is not available locally by going 

online, getting the best available price and having it delivered to 

their door. Should consumers in every State have the same ability 

to get well-regulated small loans and other financial services 

through the Internet if such products are not otherwise available 

locally? 

A.4. Yes, absolutely. 

Q.5. Michael Flores’ recent study, Online Short-Term Lending, 

points out that the primary alternatives to payday loans are often 

significantly more costly than payday loans. Given that finding, 

would underserved consumers who now rely on potentially less 

costly payday loans be helped or harmed if additional States or the 

CFPB prohibited or severely restricted access to these loans? If 

credit products like payday loans or banks’ deposit advances are 

eliminated, what happens to the demand for such products? 

A.5. My analysis indicates that the $5 million loss of deposit advance products will cost consumer significantly more because their 

options are limited to mush more expensive overdrafts and slightly 

more expensive payday loans (if the consumer is in a State that allows these loans). 

The consumer is ultimately hurt when credit options are limited. 

If most legal credit options are eliminated and demand for credit 

is not assuaged, then consumers will be forced into unlicensed or 

illegal options. 

Q.6. In States with arbitrary rate caps not set by the market, are 

consumers who pose significantly higher credit risks really able to 

get the credit they need? 

A.6. It is very difficult for these consumers to access credit from licensed and legal sources. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR MORAN 

FROM G. MICHAEL FLORES 

Q.1. Many have criticized what they claim is a lack of price competition in the current marketplace for small consumer loans. Do 

you believe that the current patchwork of proscriptive State laws 

is limiting competition, preventing lenders from achieving otherwise available economies of scale or preventing innovative products 

from reaching a wider marketplace? What can Congress do to help 

make innovative products like Ms. Klein’s company is offering in 

a limited number of States accessible for all consumers? 

A.1. In a more open market with consistent rules from coast to 

coast, consumers will benefit from price competition from a variety 

of companies wishing to compete for their business. 

I believe a national operating platform that is proposed in H.R. 

1566, is a viable approach and should be considered by the Senate. 

Q.2. Given the diversity of State lending laws, is it realistic to 

think that more affordable, better suited, yet commercially viable 

short term installment loans that fit with today’s consumer mobilVerDate Nov 24 2008 10:55 Dec 19, 2014 Jkt 046629 PO 00000 Frm 00091 Fmt 6602 Sfmt 6602 L:\HEARINGS 2014\03-26 ARE ALTERNATIVE FINANCIAL PRODUCTS SERVING CONSU
88 

ity and technology trends can be offered without some type of Congressional action? 

A.2. No, there must be a national platform to allow a rollout of 

products which costs can be spread across all markets. 

Q.3. You mentioned that a House bill, H.R. 1566, is the best approach suggested so far for meeting consumers’ credit needs. Can 

you explain why you believe this bill can provide a real solution to 

the credit access problems faced by millions of American families? 

A.3. This bill will provide an operating platform to allow companies 

to operate and compete for a consumer’s business. Operating in a 

50 State environment will allow companies to achieve economies of 

scale in order to offer price competitive products. The more companies who compete will also push innovation and lower process, to 

the ultimate benefit of the consumer. 

Q.4. When issuing rules implementing the Dodd-Frank Act, the 

OCC made the following very clear and compelling comment regarding the importance of uniform national lending standard for 

national banks: 

‘‘Throughout our history, uniform national standards have 

proved to be a powerful engine for prosperity and growth. National 

standards for national banks have been very much a part of this 

history, benefiting individuals, business and the national economy. 

In the 21st Century, the Internet and the advent of technological 

innovations in the creation and delivery of financial products and 

services has accentuated the geographic seamlessness of financial 

services markets, highlighting the importance of uniform standards 

that attach based on the product or service being provided, applying wherever and however the product or service is provided. However, the premise that Federally chartered institutions would be 

subject to standards set at the Federal, rather than State-by-State 

level, does not and should never mean that those institutions are 

subject to lax standards . . . [Any] concerns that have been expressed that Federal consumer protection rules were not sufficiently robust should be addressed by the CFPB’s authority and 

mandate to write strong Federal consumer protection standards, 

and its research-based and consumer-tested rulemaking processes 

envisioned under the Dodd-Frank Act.’’ 

Isn’t H.R. 1566, the House bill you mentioned that would create 

a Federal charter for qualified online nonbank lenders, aimed at 

giving these lenders the same operating efficiencies as national 

banks, letting them to innovate by giving them the ability to lend 

nationwide, subject to strong Federal regulation, ensuring that consumers everywhere can benefit from better, more innovative financial products, which necessitates uniform national standards as the 

OCC pointed out? 

A.4. Yes as I mentioned in the preceding answer. 

Q.5. Your testimony notes that ‘‘Innovative companies, many of 

them operating exclusively on the Internet, are trying to design 

flexible products to meet’’ consumer credit demands, but that many 

in industry tell you that ‘‘real innovation is limited’’ because of diverse State lending laws. How do you see these State laws affecting 

consumers as they seek to obtain innovative, more affordable small 

89 

loans and other financial products through the Internet? Would 

Federal legislation open up credit access? 

A.5. The Internet is the ultimate (to date) disruptive technology. 

State laws and State barriers to entry worked when we all lived 

in an analogue world where consumer were limited to products and 

services offered by businesses who had physical operations in the 

market where the consumer lived. Some of these State laws were 

designed to protect local businesses from out-of-State competition. 

Businesses today must adapt to today’s realities and cannot be protected from companies who may be able to provide a better product 

or service at less expense. 

While I understand the ‘‘States’ rights’’ argument about overreach by the Federal Government, it is a fait accompli that consumers have access to products and services from all over the 

globe. 

I believe Federal legislation would, indeed, open up access to 

credit and allow the development of a variety of products designed 

to meet unique needs of consumers. 

One last point I would like to make. During the questioning, Senator Merkely asked about the Oregon law that prohibits payday 

loans. While the Oregon law does have a 36 percent rate cap, it 

does allow for a $10 per $100 origination fee (up to $30) for each 

new loan in addition to the 36 percent interest. This is a hybrid 

payday product and companies can make this loan because of the 

origination fee. If consumers find this product useful for their circumstances, a national charter would not inhibit companies from 

offering this loan. 

RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN BROWN 

FROM NICK BOURKE 

Q.1. The FDIC and consumer groups have advocated for small-dollar products that have four features: 

a. reasonable APRs; 

b. repayment period longer than 90 days; 

c. ability to repay principal; 

d. and the borrower demonstrates an ability to repay the loan in 

full. 

Some lenders have responded to criticism of the payday product 

by moving toward installment loans. You stated in your testimony 

that installment loans are an encouraging market solution for consumers. As an example of an installment product, Enova offers a 

7 months and 13 months installment product in New Mexico with 

APRs of 389 percent and 393 percent, respectively. 

As industry moves toward lengthening repayment terms, is it 

possible to address the issue of affordability of small-dollar credit 

products without addressing all four of the features mentioned? 

Please explain why or why not. 

A.1. In the vast majority of cases, lump-sum payday loans will not 

meet any rational ability-to-repay test, requiring lenders instead to 

provide installment loans that borrowers can pay off over time. But 

converting a payday loan to an installment loan will not by itself 

90 

ensure that the payments are affordable. More rigorous ability to 

repay standards are required, as well as other safeguards. Pew’s 

research has demonstrated that most payday loan borrowers cannot afford to spend more than 5 percent of their periodic pretax income on loan payments (for example, a typical borrower making 

$2,500 per month could not afford loan payments of greater than 

$125 per month). Loans that meet this 5 percent benchmark may 

merit streamlined regulatory underwriting requirements if policy 

makers wish to promote access to credit for those with damaged 

credit histories. 

However, any loan that requires periodic payments in amounts 

that exceed 5 percent of a borrower’s gross periodic paycheck must 

be rigorously underwritten to ensure the borrower can repay the 

loan and all other expenses without reborrowing. These requirements generally will result in installment loans, though they do not 

preclude the possibility of loans that could last shorter than 90 

days. 

Pew does not have a specific recommendation regarding the price 

of small-dollar loans that are marketed to those with damaged 

credit histories. However, setting maximum allowable prices is 

warranted in markets, such as this one, where there is evidence 

that competition does not put downward pressure on prices or 

where consumers are inherently vulnerable. Research shows that 

lenders generally do not compete on price in these markets serving 

those with poor credit, which is why almost every State has laws 

that set maximum allowable rates on small-dollar loans. Without 

regulations, prices reach levels that are highly disproportional to 

lender cost, or far higher than necessary to ensure access to credit. 

Colorado’s payday loan law shows it is possible to ensure widespread access to loans of $500 or less for people with poor credit 

histories, at prices far lower than those charged for conventional 

payday loans. It is also possible that such credit could be available 

at rates lower than the average APR of 129 percent in Colorado. 

In States that have permitted higher interest rates than this, storefronts have proliferated, with no obvious additional benefit to consumers (for more information, see Pew’s recently released fact 

sheet, How State Rate Limits Affect Payday Loan Prices). 

States may reasonably choose to set maximum annualized interest rates of 36 percent or less if they do not want payday lenders 

to operate. States may also reasonably choose to allow interest 

rates higher than 36 percent if they do want payday lenders to operate. Meanwhile, the Consumer Financial Protection Bureau must 

take action to ensure that all small-dollar loans are safe and transparent. The CFPB should enact a strong ability to repay standard, 

and require several commonsense safeguards for small-dollar loans. 

These safeguards include requirements for substantially equal payments that amortize smoothly over time, and for spreading fees 

and costs evenly over the life of the loan to reduce the risk of loan 

flipping, i.e., lender-driven refinancing that creates long-term indebtedness and drives up cost. More discussion is provided in our 

response to Question 2 below. 

For more information: Please see Pew’s Policy Solutions report 

(2013). Section 3 (starting at page 26) discusses factors for ensuring 

affordability in installment loan markets. Section 4 (starting at 

91 

page 33) discusses important considerations for payday loan reform, including a number of common problems found in installment 

loan markets in addition to the ability to repay problem. Pew’s detailed policy recommendations are found on pages 44–47. 

For more on the lack of price competition in payday loan markets, see How State Rate Limits Affect Payday Loan Prices (The 

Pew Charitable Trusts, 2014). 

A collection of Pew’s research on small-dollar lending, including 

summaries and interactive displays, is available at 

www.pewtrusts.org/small-loans. 

Q.2. You stated in your testimony that ‘‘lenders’ reliance on longterm borrowing behavior indicates a fundamental flaw in the business model that can only be addressed by requiring loans to be 

structured differently (mainly, as installment loans).’’ 

What research has Pew conducted to determine if similar rollover behaviors are expected from an installment product? 

A.2. Pew’s Payday Lending in America series of reports has demonstrated the significant gap that exists between how payday loans 

are packaged and marketed (i.e., as short-term, fixed-fee products 

for temporary needs) and how most borrowers experience them (the 

average borrower is dealing with an endemic financial shortfall, is 

in payday loan debt for 5 months, and pays $520 in finance 

charges, nearly ten times the advertised price of a typical payday 

loan). The conventional payday loan business model relies on this 

gap for its profitability. Analysis of State regulatory data shows 

that nearly all lender revenue comes from repeat borrowers: Lenders make 97 percent of their revenue from borrowers who use three 

or more loans per year, and 63 percent of revenue from those using 

12 or more loans per year. Consecutive usage is the norm. According to the CFPB, 80 percent of loans originate within 14 days of 

a previous loan, and half of all loans occur within a continuous sequence often or more loans. 

Similar problems can occur in installment loan markets. For example, installment loans with front-loaded or unaffordable payments can lead to refinancing and nontransparent cost structures, 

as described in the following excerpt from Pew’s Policy Solutions 

report (2013), at pages 33–34 (citations are not included below but 

can be found in the original report): 

When lenders can earn nonrefundable fees for originating 

loans, or when they can front-load interest during the beginning of the repayment period, they have incentive to 

encourage customers to refinance, or flip, loans. Flip is 

used to describe reborrowing that a lender encourages, 

whereas renew and reborrow have been used in this series 

to describe additional borrowing caused by an inability to 

cover expenses after repaying a loan. 

Loan refinancing can give borrowers access to additional 

credit when they want it. Take, for example, a borrower in 

the third month of a 6-month installment loan. The borrower might be eligible to refinance the loan because she 

has paid down some of the principal. Refinancing would 

provide her with cash in hand. But it would also extend 

her indebtedness by pushing back the loan’s payoff date. 

92 

If lenders can use refinancing to earn more fees immediately, or if they can calculate interest to earn a disproportionately high share of revenue during the loan’s 

first few months, they have an incentive to flip loans. This 

flipping places borrowers at risk of financial harm because 

of the new fees, interest payments, and additional months 

of debt. Excessive refinancing also can mask delinquencies, 

because if borrowers are unable to afford loan payments, 

lenders can effectively let them skip a payment by agreeing to extend the duration of their loan, a process known 

as re-aging loans. 

There are two lender incentives to encourage refinancing 

that can cause borrowers financial harm. 

[1] When small loans carry an origination fee, lenders can 

earn a substantial portion of revenue at the outset of the 

loan, creating a strong incentive to encourage borrowers to 

refinance or pay it off and reborrow quickly so the lender 

earns another origination fee. As a result, refinancing is 

common in small-loan markets that allow an origination 

fee to be earned in full when the loan is made. 

Lenders may rely on origination fees to provide a measure 

of predictability in their revenue streams in the event that 

borrowers repay the loans early. Yet since most small-dollar loan borrowers cannot pay the loans off quickly, lenders can rely on their paying interest charges for several 

months (as in Colorado, where the average borrower carries a loan for more than three months even though money 

is saved by paying off earlier). And although lenders might 

legitimately employ such fees as compensation for the cost 

of opening new loans (as ‘‘origination fee’’ suggests), policy 

makers must be aware of the strong link between origination fees and loan flipping. 

In this market, lenders’ desire to supplement interest income by adding origination fees seems minor compared 

with the significant risk that loan flipping poses to consumers and the marketplace. Accordingly, policy makers 

should limit the use of origination fees in small-dollar loan 

markets. Possible approaches include limiting fees to a 

nominal amount, restricting the number of fees to one per 

borrower in a year, or, as Colorado lawmakers have done 

and as Pew recommends, requiring any fees to be spread 

evenly over the life of the loan, so they would be refunded 

on a pro rata basis if loans are refinanced or repaid early. 

[2] In some States, lenders are allowed to use accounting 

methods that overweight the accrual of interest charges 

during the loan’s early months, meaning that initial payments include a relatively high proportion of interest revenue for lenders, and payments in later months have relatively low interest revenue. Such front-loading methods, 

often known as the ‘‘rule of 78s’’ or ‘‘sum of digits,’’ 

incentivize refinancing because lenders earn far more interest income at the outset of the loan than they would 

using the standard actuarial method of calculating interest 

93 

used for other financial products, such as mortgages or 

auto loans. 

When lenders can book much of the interest revenue during the early months of a loan, they have an incentive to 

flip loans into new ones, so that more of these lucrative 

early months occur. This can lead to practices that entice 

borrowers to refinance loans to receive a fresh infusion of 

cash, despite the costly net impact of front-loaded interest 

payments. The harm to borrowers who refinance or pay off 

their loan early is that more interest and less principal are 

paid than would be paid under a conventional method of 

calculating interest. Lawmakers sometimes address this 

problem by requiring lenders to use the standard actuarial 

method. Pew recommends this approach as well. 

Of course, lenders have a natural incentive to encourage 

repeat business. Default risk is higher with new borrowers 

than with existing customers. It also generally costs lenders far more to acquire a new customer than to keep an 

existing one, giving them an incentive to extend their relationships with customers, as is true with other businesses. 

If a borrower can pay off a loan and cover other expenses, 

and then chooses to borrow again, this dynamic might pose 

no problem. But when a lender maintains a long-term relationship with a borrower by encouraging frequent refinancing, the borrower does not receive the benefits of a 

nominally closed-end loan. In such cases, a gap between 

packaging and experience emerges and leads a borrower to 

spend more and stay in debt longer than the loan’s initial 

terms stated. 

In sum, consumers can be harmed by small-dollar installment loans in the absence of regulations that eliminate 

lender incentives to flip loans. 

Q.3. Lenders offerings small-dollar installment credit products 

claim they can help borrower build a credit history and improve 

credit scores. Enova testified that they have been working to foster 

relationships with the major credit bureaus, and hope to help consumers build credit history. 

Can you explain how these products have improved the credit 

scores for individual consumers? 

Conventional payday lenders making lump-sum and installment 

payday loans generally do not report to credit bureaus. Nonbank 

installment lenders generally do report to credit bureaus. There 

has been little research on the credit score trajectory of nonbank 

installment loan customers. In order for customers to be successful 

in using installment loans and improve their credit scores, it is crucial that the loan payments are affordable and fit within their ability to repay. 

It is worth noting that access to additional credit will not lead 

to better outcomes for some borrowers. Customers who turn to 

high-interest small-dollar loans often have very low credit scores 

because they are already heavily indebted and/or struggling to 

make ends meet. For example, rather than being ‘‘thin file’’ or ‘‘no 

file’’ consumers who are creditworthy but lack access to mainVerDate Nov 24 2008 10:55 Dec 19, 2014 Jkt 046629 PO 00000 Frm 00097 Fmt 6602 Sfmt 6602 L:\HEARINGS 2014\03-26 ARE ALTERNATIVE FINANCIAL PRODUCTS SERVING CONSU
94 

stream credit, most payday loan borrowers are ‘‘thick file’’ consumers who have substantial experience with debt. More than half 

of payday loan borrowers carry credit card debt, two in five own 

homes (many with mortgages), and many also hold student loans, 

auto loans, and other debt. The average payday loan applicant has 

a credit score in the low 500s, indicating an assessment by credit 

reporting agencies that payday borrowers are already overburdened 

with debt and/or struggling to meet financial obligations. For more 

information, see Pew’s Policy Solutions report (2013), at pages 26– 

27 (the section entitled, ‘‘The Limited Benefits of Access to Credit’’). 

Q.4. Payday loans are advertised as 14-day or 30-day loans. As 

Pew stated in the Payday Lending in America series, lenders market small-dollar credit loans, such as payday loans, as a ‘‘safe,’’ 

‘‘sensible financial choice,’’ and ‘‘the best alternative to meet their 

current needs’’ for a ‘‘onetime fixed fee.’’ 

You testified that borrowers were on average indebted for 144 

days, and CFPB found that they were indebted for 199 days. The 

Online Lenders Alliance consumer study shows that consumers 

have an average of 70 to 120 days of indebtedness per year. 

Please explain how do these findings reinforce that the shortterm small-dollar products are not in fact designed to be repaid according to their terms? 

A.4. These findings demonstrate a large gap between how a product is packaged and how it is experienced. As demonstrated below, 

this gap exists because of loan structures that promote frequent refinancing and business models that cannot be profitable without 

such frequent refinancing. 

A. Most payday loan borrowers are in long-term financial distress, and they turn to payday loans for funds to cover regular 

monthly costs. 

• Payday borrowers routinely struggle to pay their bills: 58 percent report having trouble paying regular bills at least half the 

time, and one-quarter have trouble paying bills every single 

month. 

• 69 percent of payday borrowers turned to a payday loan for 

help paying recurring expenses (such as rent, mortgage, utilities, credit card bills, and so on). 

B. Payday loans are fundamentally unaffordable because they 

take too much of a typical borrower’s next paycheck, undermining 

their ability to repay the loan and keep up with regular bills. 

• A typical payday loan requires a payment of $430 on the borrower’s next payday, or 36 percent of a typical borrower’s gross 

(pretax) paycheck. 

• Most borrowers can afford to pay no more than 5 percent of 

their pretax paycheck toward a loan while meeting other financial obligations without having to borrow again to make ends 

meet. 

C. When loan payments exceed borrowers’ capacity to repay, extended usage is the norm. 

95 

• Unaffordable payments lead to consecutive reborrowing: 80 

percent of payday loans originate within 14 days of a previous 

loan. 

• The average payday borrower is in debt for 5 months of the 

year, even though many borrowers sought to avoid ‘‘more debt’’ 

or ‘‘another bill.’’ 

• The average borrower pays $520 in fees per year, far higher 

than the $55 ‘‘fixed fee’’ for the average payday loan. 

D. The payday loan business model requires extended usage to 

be profitable 

• Almost all payday revenue comes from repeat borrowers: 97 

percent of loans go to those using three or more per year, and 

63 percent of loans comes from those who use 12 or more per 

year. 

• The business model is not profitable until the average borrower uses four to five loans per year. 

Payday and other small-dollar loan business models are fundamentally reliant on this pattern of unaffordability and reborrowing for their profitability—a fact that represents one of the 

most striking failures of this marketplace and one which policy 

makers have too often overlooked. Going forward, regulators should 

monitor the percentage of revenue that payday and installment 

lenders receive from loan refinancing, because high rates of refinancing are indicative of poor underwriting or other harmful practices. 

Q.4. The most recent report released by the CFPB shows that 58 

percent of borrowers who take out payday loans on a monthly basis 

are recipients of some kind of benefits—Social Security, SSDI, unemployment—or retirement income. The white paper the CFPB released last year found that 22 percent of all borrowers are on some 

form of public assistance or relying on retirement income. 

Payday is usually advertised as a short-term stopgap to fill a 

consumer’s financial needs until the borrower receives some new 

source of income. This is not the case for borrowers on a fixed income from Government assistance or in retirement. 

How safe are these products for individuals living on fixed incomes? 

Should we be concerned that Government benefits payments are 

going to companies that may be taking advantage of borrowers? 

A.4. Pew’s research has found that 41 percent of borrowers use a 

cash infusion, like a tax refund or help from family or friends, to 

repay a payday loan. Academic research has found that payday 

loan balances outstanding decline during the early months of the 

year when tax refunds are distributed. An average payday loan 

payment requires 36 percent of an average borrower’s bi-weekly income. This figure will average 15 to 20 percent for someone who 

receives income monthly instead. Pew’s research indicates that 

most borrowers can spend no more than 5 percent of their income 

on payday loan payments while meeting other expenses. Therefore, 

without a cash infusion, many people on fixed incomes have difficulty retiring payday loan debts because of the loan’s lump-sum 

payment structure. 

96 

Q.5. Payday loan contracts are considered simple in comparison to 

the terms associated with other consumer credit products, such as 

mortgages, credit cards, and other alternative small-dollar credit 

like auto-title and installment loans. However, it is clear that borrowers have trouble understanding and assessing their ability to 

repay since consumers who use these products are in continuous 

debt. 

Can you explain why it is common for borrowers to inaccurately 

predict their ability to repay in full the loan and their likelihood 

for taking out subsequent loans? 

What type of disclosures would be most useful? 

How would disclosing APRs help borrower assess the actual cost 

of the loan? 

A.5. Under a lump-sum loan structure, only a product’s 2-week cost 

is clear, but very few loans are made to customers who repay them 

without quickly reborrowing. This gap means that the product’s 

stated cost is dramatically different from how much the borrower 

ultimately spends. As an example, when Colorado had lump-sum 

payment loans under its previous law, the stated cost represented 

only 13 percent of the dollars spent by an average customer annually. After the law change created a transparent installment product, the stated cost represented 87 percent of the dollars spent by 

an average customer annually. 

Excerpts from How Borrowers Choose and Repay Payday Loans 

and Policy Solutions follow: 

More than three-quarters of borrowers in Pew’s survey 

stated that they rely on the payday lender to provide accurate information, but information is provided only about a 

two week product, even though borrowers end up indebted 

for an average of 5 months. Because the loans do not amortize, paying just the fee—the salient price that borrowers 

are instructed to pay if they cannot afford full repayment—does not reduce the amount owed, leaving them no 

closer to eliminating the debt. Therefore relying on the 

lender for accurate information makes the ultimate cost 

and duration of the debt extremely difficult to predict. 

Financial education and disclosures are important tools for 

helping people decide whether a product that many successfully use is appropriate for them. Public explanations 

and advice on the terms and conditions for a home mortgage, student loan, auto loan, or credit card are commonplace. Many people use these products successfully and as 

advertised. 

Some do not, and financial education and disclosures can 

help consumers avoid the downsides of these products. In 

contrast, payday loans are not used successfully on a 

short-term basis by many people, and if they were, the industry would not be profitable. 

Neither disclosures nor financial education can solve the 

problems caused by lump-sum repayment payday loans because their structure hides the most common outcome—repeated reborrowing of the original loan. 

97 

Although financial education and disclosure cannot solve 

the problems with lump-sum payday loans, they will be an 

important component in a properly functioning marketplace for installment loans. When designed to avoid the 

pitfalls discussed earlier in this section, such loans can be 

used successfully by many people, but they will not be appropriate for some. In that case, financial education and 

clear disclosures can help people decide whether they 

should borrow and if so, whether such products are a good 

choice for them and how to use those products successfully. 

One method for measuring the value of financial education 

and disclosures will be whether consumers comparisonshop and seek out lower prices for loans. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR TOOMEY 

FROM NICK BOURKE 

Q.1. Do you think most unbanked or underbanked Americans are 

capable of handling their own finances, or do you feel that Government needs to step in and ‘‘protect them from themselves’’ by such 

actions as credit rationing or denying them certain credit products? 

A.1. A key policy goal should be to ensure a safe and competitive 

marketplace, in which all potential borrowers of small-dollar loans 

can choose products based on transparent information that allows 

them to predict costs accurately. Unfortunately, there is extensive 

evidence that the small-dollar loan market fails this test. 

For example, consider the large gap that exists between how a 

payday loan is advertised or packaged and how it is experienced. 

As demonstrated below, this gap exists largely because of loan 

structures that encourage frequent refinancing and business models that cannot be profitable without such frequent refinancing. 

A. Most payday loan borrowers are in long-term financial distress, and they turn to payday loans for funds to cover regular 

monthly costs. 

• Payday borrowers routinely struggle to pay their bills: 58 percent report having trouble paying regular bills at least half the 

time, and one-quarter have trouble paying bills every single 

month. 

• 69 percent of payday borrowers turned to a payday loan for 

help paying recurring expenses (such as rent, mortgage, utilities, credit card bills, and so on). 

B. Payday loans are fundamentally unaffordable because they 

take too much of a typical borrower’s next paycheck, undermining 

their ability to repay the loan and keep up with regular bills. 

• A typical payday loan requires a payment of $430 on the borrower’s next payday, or 36 percent of a typical borrower’s gross 

(pretax) paycheck. 

• Most borrowers can afford to pay no more than 5 percent of 

their pretax paycheck toward a loan while meeting other financial obligations without having to borrow again to make ends 

meet. 

98 

C. When loan payments exceed borrowers’ capacity to repay, extended usage is the norm. 

• Unaffordable payments lead to consecutive reborrowing: 80 

percent of payday loans originate within 14 days of a previous 

loan. 

• The average payday borrower is in debt for 5 months of the 

year, even though many borrowers sought to avoid ‘‘more debt’’ 

or ‘‘another bill.’’ 

• The average borrower pays $520 in fees per year, far higher 

than the $55 ‘‘fixed fee’’ for the average payday loan. 

D. The payday loan business model requires extended usage to 

be profitable 

• Almost all payday revenue comes from repeat borrowers: 97 

percent of loans go to those using three or more per year, and 

63 percent of loans comes from those who use 12 or more per 

year. 

• The business model is not profitable until the average borrower uses four to five loans per year. 

Payday and other small-dollar loan business models are fundamentally reliant on this pattern of unaffordability and reborrowing for their profitability—a fact that represents one of the 

most striking failures of this marketplace and one which policy 

makers have too often overlooked. 

Fifteen States do not have payday lending stores, usually because they have declined to exempt payday lenders from the State’s 

usury laws. Existing research is inconclusive as to whether individuals fare better with or without access to high-interest credit, but 

the research is clear that where high-interest credit is available, 

borrowers who use loans with affordable payments fare better than 

those who use loans with lump-sum payments. 

Some States have decided to allow high-interest credit, but with 

limits on how many loans, or how much money, a customer may 

borrow at a time or in a year. In Colorado, officials recognized that 

payday loans were working poorly, largely because their payments 

were unaffordable. The 2010 reform they passed, requiring at least 

6 months to repay in affordable installments, instead of a 2-week 

balloon payment, has succeeded as a result. An excerpt from Pew’s 

Policy Solutions report follows, describing why Colorado officials 

elected to fix the failed balloon-payment payday loan, rather than 

leaving it intact and attempting to mitigate its harm through limiting its usage: 

Some States with loan-rationing strategies have decreased 

the volume of borrowing, and have saved consumers 

money and protected them against some of the financial 

harm from the long-term use of payday loans. But such 

measures do not address the loans’ fundamental 

unaffordability. Furthermore, rationing amounts to a tacit 

admission that the lump-sum repayment payday loan is 

fundamentally broken or harmful. Rationing requires a 

database to track and limit loan usage, yet State-administered databases are not typical for other financial products. Instead, credit decisions are generally left to borVerDate Nov 24 2008 10:55 Dec 19, 2014 Jkt 046629 PO 00000 Frm 00102 Fmt 6602 Sfmt 6602 L:\HEARINGS 2014\03-26 ARE ALTERNATIVE FINANCIAL PRODUCTS SERVING CONSU
99 

rowers and lenders, and State governments rarely limit 

usage or control borrowing behavior. 

Colorado legislators explicitly rejected loan rationing, electing instead to address the fundamental unaffordability of 

the loan rather than preserving the product’s unaffordable 

structure and then trying to mitigate its harm through 

limiting the number of loans or renewals. One elected official explained the Government’s intentions in replacing the 

old law: ‘‘They get a loan, two weeks they have to pay $575 

back. Well, they didn’t have the money to begin with. 

What changed in two weeks to allow them to deal with 

that? Nothing. So then they were caught in a cycle. So 

making it more affordable and allowing them to pay it over 

6 months . . . was key to being able to solve the cycle of 

debt.’’ 

An additional reason for rejecting a loan-rationing approach was a dislike of databases to track loan usage. One 

elected official said: ‘‘People in Colorado don’t like those 

things [databases] . . . . To me, that’s like, ‘the Government wants to know what?’ ’’ Another elected official said: 

‘‘I’m opposed to that kind of micromanagement from the 

Government.’’ A consumer advocate agreed that opposition 

to a database was widespread: ‘‘There’s absolutely no support in our legislature for a database from either side. In 

fact, we had a database built into the bill in ’08 initially, 

and it caught as much flak from people on the left as it 

did on the right. It was an absolute nonstarter, which was 

also the problem with the loan restriction bill that caused 

a great difficulty, and we had to have a database for that 

in order to make it work.’’ 

Officials in Colorado decided to focus on fixing the problems that existed with the product, rather than leaving it 

intact and placing behavioral constraints on the borrower. 

Q.2. Some argue that States should not be rationing credit because 

in some cases consumers act irresponsibly and get deeply in debt. 

Do you agree, or do you support Government stepping in and rationing credit? Some also argue that loan prices should be set by 

the free market and should not be subsidized by the Government. 

What do you think about this issue? Should unbanked and underbanked consumers who pose higher credit risks have their loans 

subsidized or be given some type of Governmental support, or 

should rates be set through the free market? 

A.2. There are many financial products that a minority of customers use irresponsibly or poorly, while most use them successfully, as designed. With products like these, financial education and 

disclosures are good tools to preserve the benefits of the products 

for most customers, but help the minority avoid harm. In contrast, 

payday loans are used as designed by few customers, and the product’s balloon-payment structure predictably leads to a situation 

where most borrowers fail. Approximately 80 percent of loans are 

made within 2 weeks of a previous loan’s due date, indicating that 

customers do not have the ability to repay the loans without quickly reborrowing. 

100 

Unbanked consumers are generally ineligible for payday loans, 

because they cannot provide access to their checking account via 

postdated check or ACH as collateral for the loan. While payday 

loan borrowers have poor credit scores, an excerpt from Policy Solutions follows, explaining that the driver of high payday loan 

prices is not credit loss (borrower risk): 

Payday loan interest rates are not high simply because 

lenders must compensate for high losses; they are high primarily because of overhead. Although payday borrowers 

generally have a damaged credit history, two-thirds of revenue covers storefront and corporate overhead and only 

one-sixth covers losses. This dynamic helps explain why 

lenders do not assess ability to repay: Underwriting reduces losses, which are already low, but can increase costs, 

which are already high. 

On the question of pricing, the same lenders charge similar borrowers very different prices for the same loans, based on State interest rate limits. In some States, lenders charge more than double 

for the same loan what they charge in other States. In States that 

have set lower-than-average limits on payday loan prices (but still 

above 36 percent APR), access to credit has not been significantly 

constrained. Another excerpt from Policy Solutions follows: 

Nearly all States have set maximum interest rate limits 

for some types of loans. All 13 original colonies did so. 

Today, 46 States and the District of Columbia set limits on 

the interest rates that may be charged on at least one type 

of small-dollar loan. Even in the 35 States that allow highinterest, lump-sum payday loans, 28 limit the permissible 

charges. In other words, small-dollar loan markets normally operate with State-mandated price limitations. Previous research finds that payday borrowers do not focus 

primarily on price when taking out a loan, but rather on 

convenience and speed. Further, demand for payday loans 

is not sensitive to price. The United Kingdom’s Office of 

Fair Trading conducted a review of the payday lending industry in that country, which also uses lump-sum repayments. Among its findings: ‘‘A significant proportion of 

payday borrowers have poor credit histories, limited access 

to other forms of credit and/or a pressing need of money 

at the point of taking out a loan. As such they may be focused on the speed and convenience of the loan rather 

than its price. Price insensitivity among consumers is likely to weaken price competition, thereby enabling lenders to 

raise their prices without losing business.’’ In such circumstances, setting maximum allowable rates can ensure 

that borrower costs resemble those in a marketplace with 

price competition. 

Payday loan prices vary between States but rarely within 

States. Prices are determined by individual State laws, 

and large companies offer the same loan at vastly different 

prices in different States. In States where conventional 

payday loans are offered, lenders generally do not compete 

on price; they tend to cluster prices at the maximum alVerDate Nov 24 2008 10:55 Dec 19, 2014 Jkt 046629 PO 00000 Frm 00104 Fmt 6602 Sfmt 6602 L:\HEARINGS 2014\03-26 ARE ALTERNATIVE FINANCIAL PRODUCTS SERVING CONSU
101 

lowed, and then compete on customer service and location. 

As shown in the accompanying exhibit, a similar pattern 

emerges for payday lenders that also make installment 

loans. These lenders charge less in Colorado and Illinois, 

which require lower interest rates on payday installment 

loans, and more in the States that allow higher prices. 

There is little evidence of firms lowering prices to compete 

for customers—the expected result in a well-functioning 

marketplace as described in classical economic theory. 

For more on the lack of price competition in payday loan markets, see How State Rate Limits Affect Payday Loan Prices (The 

Pew Charitable Trusts, 2014). 

Q.3. As you undoubtedly know, the Post Office Inspector General’s 

Office has recently proposed that the Post Office be allowed and encouraged to begin offering small loans and other alternative financial services products through partnerships with banks and credit 

unions. Their report claims, for example, that the Post Office could 

offer a $375 loan repayable over 5 to 6 months at a rate of 28 percent APR that would generate a profit of $48 for the Post Office 

(and its banking partners). Do you find the analysis persuasive? 

A.3. In the example cited, a customer would borrow $375 and repay approximately $423 ($48 in interest and fees) over 5.5 months. The 

Inspector General’s report used the example of a 25 percent 

annualized interest rate plus a $25 loan fee. The resulting APR 

would be approximately 46 percent. Such a loan would produce $48 

in revenue, but the report did not estimate the loan’s profitability. 

Insufficient information about losses and overhead is available to 

project the profitability of the hypothetical loan described. Smalldollar loans are available from some credit unions, a few nonbank 

alternative lenders, and a few banks at rates similar to the one discussed here. Nonbank lenders have lowered prices substantially 

when States have reduced allowable prices (without corresponding 

declines in access to credit), though no conventional storefront 

lenders offer loans at prices approximating 46 percent APR. 

Q.4. The Internet has revolutionized Americans’ buying habits and 

greatly increased their product choices. Consumers today, regardless of where they are located, can obtain essentially whatever commercial product they need when it is not available locally by going 

online, getting the best available price and having it delivered to 

their door. Should consumers in every State have the same ability 

to get well-regulated small loans and other financial services 

through the Internet if such products are not otherwise available 

locally? 

A.4. Federal standards are appropriate to ensure a basic floor for 

product safety. Pew has outlined detailed policy recommendations 

in order to make payday loans safer. But a Federal charter for payday lenders would undermine the authorities over interest rates 

and consumer protections that traditionally have resided with 

States. 

Q.5. Michael Flores’ recent study, Online Short-Term Lending, 

points out that the primary alternatives to payday loans are often 

significantly more costly than payday loans. Given that finding, 

102 

would underserved consumers who now rely on potentially less 

costly payday loans be helped or banned if additional States or the 

CFPB prohibited or severely restricted access to these loans? If 

credit products like payday loans or banks’ deposit advances are 

eliminated, what happens to the demand for such products? 

In thinking about consumers’ costs, it is crucial to know whether 

one product is a substitute for another, or whether it is instead one 

used in addition to another. It is not clear that payday loans on net 

help customers spend less on other products, like overdraft. Demand for credit is also not fixed, but is instead shaped by convenience, advertising, and perceptions of providers. An excerpt on overdraft substitution from How Borrowers Choose and Repay Payday 

Loans follows: 

Payday loans are sometimes promoted as a cost-effective 

alternative to checking account overdrafts. (A major storefront and online payday lender encourages borrowers to 

‘‘use payday loans to stop a bank overdraft or NSF fee,’’ 

and a prominent online payday loan Web site states, 

‘‘avoid costly overdraft fees and charges!’’) However, more 

than half of payday loan borrowers report having overdrafted their accounts in the past year, and 27 percent report that a payday lender making a withdrawal from their 

bank account caused an overdraft. Moreover, Pew’s prior 

research has shown that the vast majority of those who 

overdraw their accounts do so by mistake, not by intention. 

Although people choose payday loans in order to avoid 

overdrafts, many end up paying payday loan fees and overdraft fees as well. 

Although it is unclear how much payday borrowing may 

reduce or increase the likelihood of checking account overdrafts, Pew’s research shows that payday loans do not 

eliminate overdraft risk. Prior research has found that 

some payday loan borrowers are explicitly choosing to use 

the loans to avoid overdrafts and bounced checks, but 

Pew’s survey research demonstrates that borrowers are incurring overdraft fees anyway. 

An excerpt on credit demand from Pew’s comment letter to the 

OCC and FDIC follows: 

Another important area to consider after a policy shift occurs is whether customers who used a product that has 

been altered will substitute an inferior product. The 

CFPB’s recent white paper examined the small number of 

banks that offer deposit advance products. At those banks, 

15 percent of all eligible checking account customers are 

utilizing deposit advances. Other data indicate that only 

four percent of adults use storefront payday loans, and 

even fewer use online payday loans. In other words, where 

banks are offering payday-like loans, they are experiencing 

very high levels of usage compared to payday loan usage 

in the general population. Conversely, where banks do not 

offer such loans, there is no evidence of higher usage of 

payday loan stores. Thus, it should not be assumed that 

103 

bank deposit advance borrowers will shift to storefront or 

online payday loans. 

Pew’s research also shows that people are no more likely 

to seek cash advances online when storefronts are not unavailable in their communities. The rate of online borrowing in States that essentially prohibit storefront payday lending is identical to the rate of online borrowing in 

States where payday loans are available from stores. 

These figures have important implications as we think 

about substitution as compared with demand generation in 

the broader small-dollar credit market. 

Pew’s research with storefront and online payday borrowers indicates that people who find themselves unable to 

pay bills are often not choosing between formal credit 

products. Instead, they choose between a variety of options, with a majority saying they would cut back on expenses, delay paying bills, borrow from family or friends, 

or sell or pawn possessions if they did not have access to 

payday loans. Thus it is important to place bank deposit 

advance loans in the larger context of borrowers’ decision 

making, recognizing that they are choosing between many 

options, and will not necessarily be motivated to seek the 

services of conventional payday lenders because of a lack 

of payday loan options at banks. 

Because of a deposit advance’s unaffordability, it is unclear 

whether it functions as a substitute for other credit products or overdrafts, or whether deposit advance borrowers 

simply pay more fees as they use both products. The CFPB 

report’s finding that 65 percent of deposit advance customers overdraft too is instructive. While it is still unclear 

whether deposit advances on net increase or decrease overdrafts, it is clear that they do not eliminate overdraft risk, 

and most borrowers pay fees for both. 

Q.6. Your report says (p. 46) that ‘‘PEW does not recommend law 

changes in the 15 States that do not have payday lending, because 

such a change may not benefit consumers.’’ On the other hand such 

a change may benefit consumers if they need a credit product that 

State law currently prohibits. Do you think consumers are better 

off with a properly structured and regulated loan at a market 

based rate than to have no loan available due to an prohibitive 

cap? 

A.6. Lump-sum payday loans are not properly structured in the 35 

States that have them, because they consistently exceed a borrower’s ability to repay (though not a lender’s ability to collect, via 

postdated check or ACH). As to whether people already struggling 

with debt fare better with or without access to additional high-interest credit, an excerpt from Policy Solutions follows: 

Rather than being ‘‘thin file’’ or ‘‘no file’’ consumers who 

are creditworthy but lack access to mainstream credit, 

most payday loan borrowers are ‘‘thick file’’ consumers who 

have substantial experience with debt. More than half of 

payday loan applicants carry credit card debt, two in five 

104 

payday borrowers own homes (many with mortgages), and 

many also hold student loans, auto loans, and other debt. 

Typical payday loan applicants have poor credit scores in 

the low 500s, indicating an assessment by credit reporting 

agencies that payday borrowers are already overburdened 

with debt and/or struggling to meet financial obligations. 

Fifty-eight percent of payday loan borrowers have trouble 

paying their bills at least half the time, and 7 in 10 use 

loans to cover ordinary living expenses, such as rent or 

utilities. Payday borrowers’ having little discretionary income helps explain why 79 percent in Pew’s survey support limiting the size of a loan repayment to a small 

amount of each paycheck. 

Whether it is wise to use short-term credit to cope with 

persistent cash shortfalls is debatable, and policy makers 

surely will continue to examine the merits of promoting 

credit for consumers who are already indebted and struggling to make ends meet especially when that credit comes 

at significantly higher cost than mainstream products. It 

is entirely possible that consumers who are already struggling with debt have financial problems that cannot be 

solved by obtaining more credit. But for those who use 

credit, requiring loans to have affordable installment payments that predictably amortize to a zero balance can 

avoid creating an unsustainable reliance on getting new 

loans to deal with shortfalls caused by repaying old ones. 

Thus it becomes clear why 90 percent of payday borrowers 

in Pew’s survey favor allowing the loans to be repaid in installments. 

Q.7. In your written submission to this Committee dated March 24, 

you discussed in-depth a report from the CFPB, CFPB Data Point: 

Payday Lending that was not publicly available until the following 

day, March 25. How did you come to have access to this report 

ahead of its public release? 

A.7. Media members with embargoed copies of reports sometimes 

call Pew for comment while they work on stories in advance of an 

embargo lifting. In these instances, media members may share embargoed copies of a report in order to gain Pew’s perspective on the 

report for their piece. Pew received the CFPB report on March 24 

in this way in order to provide comments to the media. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR VITTER 

FROM NICK BOURKE 

Q.1. Mr. Bourke, Harris Interactive recently conducted a national 

survey that found that payday loan borrowers indicated their experience was better than expected or as expected 96 percent of the 

time in regards to terms and 92 percent of the times in regards to 

cost. It also found that 84 percent of borrowers said it was very 

easy or somewhat easy to repay their loans. Given this survey’s result and the fact that consumers appear to value the option of payday loans, how does this reconcile with the ever present criticism 

of payday lenders from various advocacy groups? 

105 

A.1. Pew has also found that people in difficult circumstances are 

grateful to receive credit And because payday loans are usually due 

on the day a customer receives income, they are indeed repaid, 

though usually followed by a quick reborrow. This additional borrowing is a result of a lump-sum repayment that consumes an average of 36 percent of a person’s bi-weekly income. Customers usually cannot afford to cover basic expenses after repaying a lumpsum loan. An excerpt from How Borrowers Choose and Repay Payday Loans follows: 

In deciding whether to borrow from a payday lender, more 

than 3 in 4 borrowers rely on lenders to provide accurate 

information about the product, and lenders describe loans 

as ‘‘safe,’’ ‘‘a sensible financial choice,’’ and ‘‘the best alternative to meet their current needs’’ for a ‘‘one-time fixed 

fee.’’ The product’s stated 2-week duration appeals to the 

borrower’s desire for a quick cash infusion as well as the 

conflicting desire not to be in ongoing debt. In reality, both 

desires cannot be met. But a payday loan’s unrealistically 

short repayment period suggests otherwise by enabling 

people in difficult situations to think that the loan can 

solve their problem at an affordable fixed cost so they can 

avoid asking for help, cutting back further, or creating another ongoing bill. 

The ultimate cost and duration of the loans are highly unpredictable and bear little resemblance to their 2-week 

packaging. Average borrowers end up indebted for 5 

months, paying $520 in finance charges for loans averaging $375, largely because they see their only choices as 

making a lump-sum repayment retiring their entire debt, 

which they cannot afford, or paying fees to continuously 

pay back and reborrow the loan, which they can afford but 

which does not reduce what they owe. Once they have borrowed, neither choice is viable, leaving them indebted far 

beyond their next payday. This experience leaves borrowers torn—grateful to have received respectful customer 

service and credit when they sought it, but feeling taken 

advantage of by the loan’s cost and frustrated by the difficulty of repayment. 

Q.2. A study entitled, ‘‘Consumer Borrowing After Payday Loan 

Bans’’ was recently published by Jacob Goldin and Tatiana 

Homonoff professors at Princeton and Cornell. The study examines 

the changes in consumer borrowing behavior when they lose access 

to payday loans, specifically the effect of payday loan restrictions 

at the State level. The study finds that payday loan bans do not 

reduce the amount of individuals who take out alternative financial 

services products, but instead force consumers to choose different 

inferior credit options. Do you believe research should continue to 

be to done to fully understand how regulations will affect consumers and their access to credit, before more haphazard rules and 

regulations for the short-term lending industry are enacted? Has 

PEW considered increasing their research on payday lending in an 

effort to focus on how to provide and not limit credit options for 

consumers? 

106 

A.2. Pew has conducted extensive research on payday lending, and 

has studied the literature on the topic. It is unclear whether people 

fare better or worse with access to high-interest loans, but it is 

very clear that they fare better with loans that have affordable 

(usually installment) payments compared to high-interest loans 

that have balloon payments. Pew’s policy recommendations show 

how loans can be better for borrowers and viable for lenders, alleviating the substantial problems in the small-dollar, high-cost credit marketplace. The recommendations follow: 

1. Limit Payments to an Affordable Percentage of a Borrower’s Periodic Income 

Research indicates that for most borrowers, payments above 5 

percent of gross periodic income are unaffordable. 

Any small-dollar cash loan should be presumed to be 

unaffordable, and therefore prohibited, if it requires payments of 

more than 5 percent of pretax income (for example, a monthly payment should not take more than 5 percent of gross monthly income). Lenders should be able to overcome this presumption only 

by demonstrating that a borrower has sufficient income to make required loan payments, while meeting all other financial obligations, 

without having to borrow again or draw from savings. 

This 5 percent affordability threshold, which is based on survey 

research and analysis of market data, is a benchmark that policy 

makers can use to identify small-dollar loans that pose the most 

risk of harm or unaffordability. It generally will result in installment loans that have terms of months, rather than weeks, but the 

loan duration can be self-adjusting depending on the income of the 

borrower. It is also flexible enough to accommodate various policy 

choices regarding maximum loan size, duration, or finance charge. 

Normal supervision can assess compliance, so this recommendation 

does not necessitate a database. Borrowers will remain responsible 

for deciding how many loans to take and how often to use them. 

For calculation purposes, required payments would include principal, interest, and any fees. To discourage loan splitting or other 

methods of frustrating this policy, payments from all loans by a 

given lender should be considered together. Examiners should treat 

frequent refinancing or ‘‘re-aging’’ of loans as evidence of 

unaffordability and poor underwriting. 

2. Spread Costs Evenly Over the Life of the Loan 

It is important to prevent front-loading of fees and interest on installment loans. Experience shows that front-loading practices 

make the early months of the loan disproportionately more profitable for lenders than the later months, creating incentives for them 

to maximize profit by encouraging borrowers to refinance loans before they are fully paid off (a process known as loan ‘‘flipping’’ or 

‘‘churning’’). 

If fees other than interest are permitted, require them to be 

earned evenly over the life of the loan. Any fees, including origination fees, that lenders fully earn at the outset of the loan create 

a risk of loan flipping. Therefore, fees should be refundable to the 

borrower on a pro rata basis in the event of early repayment. 

107 

Require all payments to be substantially equal and amortize 

smoothly to a zero balance by the end of the loan’s term. 

Prohibit accounting methods that disproportionately accrue interest charges during the loan’s early months. Such front-loading 

schemes, often known as the ‘‘rule of 78s’’ or ‘‘sum of digits’’ methods, encourage loan flipping, because a lender earns far more interest income at the outset of the loan than in later months. 

3. Guard Against Harmful Repayment or Collection Practices 

Payday and deposit advance lenders have direct access to borrowers’ bank accounts for collecting loan repayment. Lenders use 

this access to ensure that they are paid ahead of other creditors, 

an advantage that allows them to make loans without having to assess the borrower’s ability to repay the debt while also meeting 

other obligations. Although this arrangement shields the lender 

from certain risks and may facilitate lending to those with poor or 

damaged credit, it comes at the cost of making consumers vulnerable to aggressive or unscrupulous practices. High rates of bounced 

checks or declined electronic payments are indicators of such practices. Borrowers lose control over their income and are unable to 

pay landlords or other creditors first. 

Treat deferred presentments as a dangerous form of loan collateral that should be prohibited or strictly constrained. Deferred presentment or deferred deposit loans require borrowers to give the 

lender the right to withdraw payment from the borrower’s bank account. This requirement is fulfilled through a personal check that 

is postdated to the borrower’s next payday or through a nonrevocable electronic debit authorization. Because of the inherent dangers, State laws generally authorize deferred presentments only for 

loans that are understood to serve short-term, urgent liquidity 

needs. Of the States that have deferred deposit loans, a majority 

set the maximum term at 6 months or less, and a majority set the 

maximum loan amount at $500 or less. 

Policy makers may reasonably choose to prohibit deferred presentments if they do not want payday lenders to operate. If allowed, deferred presentments should never apply for more than 6 

months or for loans of more than $500. 

Prevent unscrupulous lenders from abusing the electronic payments system, and make it easier for consumers to cancel electronic payment plans. Some installment lenders establish automatic repayment plans using electronic payment networks. Although this mechanism can help lower the cost of small-dollar 

loans and make loan management more convenient, evidence 

shows that it also exposes consumers and their checking accounts 

to significant risk. Regulators should establish a balance between 

lender and borrower interests, especially in cases—such as online 

lending markets—where there is evidence of aggressive lending or 

collections behavior. Pew recommends making it easier for consumers to stop automatic withdrawals, placing limits on the number of NSF fees that borrowers may pay, and closing the electronic 

payments system to merchants that abuse it (as evidenced by repeated attempts to withdraw funds from borrower accounts, excessive use of NSF fees, or other aggressive behavior). These goals 

may be accomplished through regulatory action and stronger overVerDate Nov 24 2008 10:55 Dec 19, 2014 Jkt 046629 PO 00000 Frm 00111 Fmt 6602 Sfmt 6602 L:\HEARINGS 2014\03-26 ARE ALTERNATIVE FINANCIAL PRODUCTS SERVING CONSU
108 

sight of the electronic payments system by the banks that operate 

it. 

Monitor and respond to signs of excessively long loan terms. 

Some high-interest installment payday lenders set excessively long 

loan terms, with only a small portion of each payment reducing the 

loan’s balance. Therefore, policy makers should consider establishing maximum loan terms. These should take into account a borrower’s financial capability, measured by income or ability to repay, 

as well as the size of the loan principal. Colorado demonstrates 

that for average payday borrowers, 6 months is long enough to 

repay $500, and in consumer finance installment loan markets, approximately 1 year is usually sufficient to repay $1,000. 

4. Require Concise Disclosures That Reflect Both Periodic and Total 

Costs 

Research shows that small-dollar loan borrowers focus on the 

periodic cost of borrowing but often struggle to evaluate overall 

cost, making it difficult to compare other loan options or to decide 

whether to borrow, adjust budgets, or take other actions. All loan 

offers should clearly disclose: 

• The periodic payment due. 

• The total amount to be repaid over the life of the loan. 

• The total finance charges over the life of the loan. 

• The effective annual percentage rate, or APR, of the loan. 

These four numbers should be displayed clearly, and with equal 

weight, to encourage borrowers to consider both periodic and longterm costs. To facilitate comparison shopping, all loan costs should 

be stated as interest, or interest plus a standard fee. If a fee is permitted in addition to interest, it should be included in the calculation of finance charges and APR, based on the loan’s stated term. 

As with other consumer financial products such as credit cards, 

regulators should require simple, standardized disclosures showing 

maximum allowable charges at the time of application as well. 

5. Continue To Set Maximum Allowable Charges on Loans for 

Those With Poor Credit 

Research shows that lenders generally do not compete on price 

in these markets serving those with poor credit, which is why almost every State has laws that set maximum allowable rates on 

small-dollar loans. Without regulations, prices reach levels that are 

highly disproportional to lender cost, or far higher than necessary 

to ensure access to credit. Colorado’s payday loan law shows it is 

possible to ensure widespread access to loans of $500 or less for 

people with poor credit histories, at prices far lower than those 

charged for conventional payday loans. It is also possible that such 

credit could be available at rates lower than the average APR of 

129 percent in Colorado. In States that have permitted higher interest rates than this, storefronts have proliferated, with no obvious additional benefit to consumers. 

States may reasonably choose to set maximum annualized interest rates of 36 percent or less if they do not want payday lenders 

to operate. States may also reasonably choose to allow interest 

rates higher than 36 percent if they do want payday lenders to opVerDate Nov 24 2008 10:55 Dec 19, 2014 Jkt 046629 PO 00000 Frm 00112 Fmt 6602 Sfmt 6602 L:\HEARINGS 2014\03-26 ARE ALTERNATIVE FINANCIAL PRODUCTS SERVING CONSU
109 

erate. But even when regulations require all loans to have affordable repayment structures, there is insufficient research to know 

whether consumers will fare best with or without access to highinterest installment loans. Thus Pew does not recommend law 

changes in the 15 States that do not have payday lending, because 

such a change may not benefit consumers. In the 35 States that 

have conventional lump-sum payday lending, lawmakers should require loans to have affordable payments and then set maximum 

annualized interest rates according to whether they want payday 

lenders to operate. 

These recommendations are intended to apply to all consumer 

cash loans of several thousand dollars or less, regardless of provider type (bank, nonbank) or product type (payday loan, installment loan, cash advance), exclusive of loans secured through 

pledge or deposit of property. They are based on findings documented in Pew’s Payday Lending in America series, available at: 

www.pewtrusts.org/small-loans. 

RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN BROWN 

FROM NATHALIE MARTIN 

Q.1. The FDIC and consumer groups have advocated for small-dollar products that have four features: 

a. reasonable APRs; 

b. repayment period longer than 90 days; 

c. ability to repay principal; 

d. and the borrower demonstrates an ability to repay the loan in 

full. 

Some in the industry have responded to this criticism of the payday product by moving toward installment loans. Enova offers a 7 

months and 13 months installment product in New Mexico with 

APRs of 389 percent and 393 percent, respectively. 

As industry moves toward the lengthening repayment terms, is 

it possible to address the issue of affordability of small-dollar credit 

products without addressing all four of the features mentioned? 

Please explain. 

A.1. In my opinion no. 

Q.2. Payday loans are advertised as 14-day or 30-day loans. Lenders market small-dollar credit loans, such as payday loans, as a 

‘‘safe,’’ ‘‘sensible financial choice,’’ and ‘‘the best alternative to meet 

their current needs’’ for a ‘‘one-time fixed fee.’’ Pew found that borrowers were on average indebted for 144 days, and CFPB found 

that they were indebted for 199 days. The Online Lenders Alliance 

consumer study shows that consumers have an average of 70 to 

120 days of indebtedness per year. 

How do these findings reinforce that the short-term small-dollar 

products are not in fact designed to be repaid according to their 

terms? 

A.2. The findings absolutely lead to this conclusion. The entire 

business model is based upon repeat users, and the industry has 

said so in many contexts publicly. This fact comes out in litigation 

110 

all over the country, as well as in empirical studies. There is little 

profit in the short term use. 

The CFPB report released in March also showed that for first 

time users, 15 percent of customers pay off and don’t go back. 20 

percent default. That means 64 percent do not use these as a short 

term product. Those 64 percent are the bread and butter of the 

business model, the ones the lenders want in their portfolios. 

Q.3. In your written testimony you stated that ‘‘in States where 

complex statutes are passed to limit high-interest lending . . . 

lenders find ways around those laws by changing the attributes of 

the loans to avoid the laws, fitting within exceptions created by 

other laws on the books, or becoming credit service organizations 

(CSOs), which are exempt from the laws.’’ You further stated this 

is a ‘‘ . . . complex game of whack-a-mole makes regulating State 

by State an expensive yet ineffective endeavor.’’ 

How would you propose addressing this issue? 

What actions would you recommend the Consumer Financial 

Protection Bureau (CFPB) take to provide a level of uniformity and 

Federal oversight of these products? 

A.3. The CFPB should implement broad rules that apply to all 

small dollar loans products, that require underwriting to ensure 

the borrower can pay his or her regular bills and also repay the 

loans, both principal and interest. The CFPB should limit the number of loans that can be taken out and require that in order to be 

enforceable, the loans must be placed in a national database and 

tracked. 

Q.4. The most recent report released by the CFPB shows that 58 

percent of borrowers who take out payday loans on a monthly basis 

are recipients of some kind of benefits—Social Security, SSDI, unemployment—or retirement income. The White Paper they released 

last year found that 22 percent of all borrowers are on some form 

of public assistance or relying on retirement income. 

Payday is usually advertised as a short-term stopgap to fill a 

consumer’s financial needs until the borrower receives some new 

source of income. This is not the case for borrowers on a fixed income from Government assistance or in retirement. 

How safe are these products for individuals living on fixed incomes? 

A.4. The products are unsafe for almost everyone who uses them 

(the exception being those with real, rare, emergencies who expect 

a great deal more income or assets in the future). They are particularly bad for those on fixed income. These loans make it much 

harder to make ends meet during the next benefit period. I also 

know some lenders specialize in ‘‘serving’’ people on disability or social security. They know the borrowers involved will never be able 

to pay back the principal and that is part of the business palm. 

Q.5. Should we be concerned that Government benefits payments 

are going to companies that may be taking advantage of borrowers? 

A.5. This is a huge problem and yes we should be very concerned. 

As mentioned above, I have heard of a small town in New Mexico 

where five lenders line main street and all or four of five specialize 

in making loans to people who receive public benefits. This is how 

111 

I learned firsthand that lenders do not want anyone paying off the 

principal. It would clearly be impossible the way they loan to people on such a low fixed income. That is part of the model. Make 

loans that people will not be able to pay off and make money on 

fees forever. 

We know lenders also discourage people from paying off their 

loans and in one reported case in New Mexico, an employee of a 

lender told a borrower that the borrower was better off using their 

tax return at Walmart. That opinion is attached. Some lenders also 

call borrowers on their way home from repaying a loan and offer 

them another loan, this time in a larger amount, perhaps in hope 

that this time, the loan will not be paid off. 

There are other situations in which this same thing is happening, meaning that Federal benefits are going to high-cost lenders. For example, some tax preparers themselves take most of the 

primary welfare benefit in America today, the earned income tax 

credit, which is designed to alleviate poverty. In both cases, the situation you mentioned and the situation with the tax preparers, we 

are literally funneling taxpayers’ money away from the intended 

beneficiaries and into the lender’s pockets. The lenders in turn give 

political campaign contributions to politicians who will ensure that 

the law continues to support these practices. No one benefits except 

the lenders and the politicians who get the contributions. Everyone 

else in society suffers. 

Q.6. Payday loan contracts are considered simple in comparison to 

the terms associated with other consumer credit products, such as 

mortgages, credit cards, and other alternative small-dollar credit 

like auto-title and installment loans. However, it is clear that borrowers have trouble understanding and assessing their ability to 

repay since consumers who use these products are in continuous 

debt. 

Can you explain why it is common for borrowers to inaccurately 

predict their ability to repay in full the loan and their likelihood 

for taking out subsequent loans? 

A.6. Some borrowers are confused about the rate because the rates 

are stated in terms on $15 per $100 borrowed or $20 per $100 borrowed. They think this is 15 or 20 percent per annum but the rate 

is just for 2 weeks or less. The actual interest rate on such a loan 

is 390–500 percent per annum. They think it sounds cheaper than 

a 25 percent credit card, for example. Also people in society have 

trouble doing math. 

Q.7. What type of disclosures would be most useful? 

How would disclosing APRs help borrower assess the actual cost 

of the loan? 

A.7. There was a great study done where researchers wrote the 

APRs and some other information on the outside of the envelope 

people received when applying for a payday loan. See Marianne 

Bertrand and Adair Morse, Information Disclosure, Cognitive Biases and Payday Borrowing, University of Chicago Booth School of 

Business (2009), available at http://ssrn.com/abstract=1532213, 

last accessed August 7, 2013. This approach worked meaning that 

people who had other options or did not really need the money 

112 

were deterred from taking out the loans. The approach taken in 

this article should be considered carefully. 

In my experience, lenders try not to draw attention to the APR, 

try to distract borrowers from seeing it, if they provide the APR at 

all. 

Q.8. Lenders offerings small-dollar installment credit products 

claim they can help borrower build a credit history and improve 

credit scores. Enova testified that they have been working to foster 

relationships with the major credit bureaus, and hope to help consumers build credit history. 

Can you explain how these products have improved the credit 

scores for individual consumers? 

A.8. Very few high-cost lenders report to the credit agencies meaning that use of these products has helped very few. I do know that 

World Finance has big signs outside their storefronts saying that 

they do report to credit agencies. I suppose this could help a few 

consumers and I know for fact that some consumers use this lender 

for that reason, rather than other high-cost lenders. Of course some 

people will ultimately default on high-cost loans and the reporting 

will hurt those consumers. 

I would like to know specifically what Enova has actually done 

to help consumers on this issue. 

113 

114 

115 

116 

117 

118 

119 

120 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR TOOMEY 

FROM NATHALIE MARTIN 

Q.1. Do you think most unbanked or underbanked Americans are 

capable of handling their own finances, or do you feel that Government needs to step in and ‘‘protect them from themselves’’ by such 

actions as credit rationing or denying them certain credit products? 

A.1. What the Government needs to do is to listen to what the 

American people have to say about regulating high cost loans, rather than to this industry and the politicians who have received campaign contributions from them. The American public, including people from both political parties, has spoken loudly and clearly. The 

public favors interest rate caps of 36 percent or less on all consumer loan products. No survey or empirical study has found otherwise. This country has always had double digit interest rate caps 

since its founding. Interest rate caps are part of our culture and 

our heritage. They are also common in other developed democracies. Having no caps is a relatively recent phenomenon, beginning in the late 1970s and early 1980s. Most people are shocked 

and disturbed to hear that it is legal to lend money at over 36 percent and some think that 36 percent is itself abusive. 

What is presumptuous and paternalistic is for politicians to listen to the high-cost loan industry rather than their constituents on 

this point. If constituents knew their own elected officials’ true 

views and voting records on these issues, the public might vote certain politicians out of office. 

Q.2. Some argue that States should not be rationing credit because 

in some cases consumers act irresponsibly and get deeply in debt. 

Do you agree, or do you support Government stepping in and rationing credit? Some also argue that loan prices should be set by 

the free market and should not be subsidized by the Government. 

What do you think about this issue? Should unbanked and underbanked consumers who pose higher credit risks have their loans 

subsidized or be given some type of governmental support, or 

should rates be set through the free market? 

A.2. Rationing is having the Government allow only a particular 

amount of something (such as gasoline or food) when there is a 

shortage. Clever use of the word, but I am not buying it. There has 

never been more credit in any economic system in history than 

what we have seen in the United States in the last decade. 

As a society, we do the opposite of rationing credit. The U.S. recently has given virtually unlimited credit to people who have no 

way of paying it back, helping them dig a deeper financial hole and 

providing more barriers to entry to the middle class. There is more 

credit in the system than there should be, evidenced by the recent 

financial crisis. We gorged ourselves on it and it crashed the global 

economy. 

My own research and that of many others show that people take 

out many payday and title loans, then default, yet lenders still 

make money off the loans. 

Existing mainstream lenders could serve more low-end consumers and still make a profit. They have chosen not to. They 

would just rather invest in options that are more profitable, like 

high-cost lenders. 

121 

Even assuming that some credit options will go away based upon 

future regulation, this is not rationing. I think consumers will be 

better off once some of the market players are gone. Twenty-two 

States plus the District of Columbia agree. This is not radical, just 

common sense. Credit at any cost? No think you. Some loans are 

bad enough that they should be illegal and are illegal in many 

States. 

Q.3. As you undoubtedly know, the Post Office Inspector General’s 

Office has recently proposed that the Post Office be allowed and encouraged to begin offering small loans and other alternative financial services products through partnerships with banks and credit 

unions. Their report claims, for example, that the Post Office could 

offer a $375 loan repayable over 5 to 6 months at a rate of 28 percent APR that would generate a profit of $48 for the Post Office 

(and its banking partners). Do you find the analysis persuasive? 

A.3. So far this is not an analysis. Feasibility and profitability 

studies still need to be done. What is exciting about the model, 

which is used in many countries around the world, and exciting 

about the idea in general, is that the infrastructure of the post office already exists. 

The U.S. postal service is being forced by Congress to prefund retiree health benefits, which itself is a questionable requirement imposed by Congress. If Congress is going to stick with this requirement, it should in turn approve the USPS to provide these loans. 

This would be a way to use the huge postal infrastructure to benefit consumers. Of course this assumes the resulting credit would 

be cheaper for consumers, something the future studies would have 

to confirm. The studies would also need to confirm that the post 

offices would generate at least some minimal income but on this 

side of the equation, it seems they would. Even a little profit for 

the post office would be a win–win. The post offices are already in 

operation and adding this feature would not significantly increase 

overhead or operations costs. 

Banks might themselves complain about how this could conceivably eat into their profits but do they have the standing to make 

that argument, now that they have pulled branches out of so many 

neighborhoods while at the same time providing funding and infrastructure for the high-cost lending industry? Let’s hope not. 

Q.4. The Internet has revolutionized Americans’ buying habits and 

greatly increased their product choices. Consumers today, regardless of where they are located, can obtain essentially whatever commercial product they need when it is not available locally by going 

online, getting the best available price and having it delivered to 

their door. Should consumers in every State have the same ability 

to get well-regulated small loans and other financial services 

through the Internet if such products are not otherwise available 

locally? 

A.4. Absolutely. Of course the question is ‘‘what is a well-regulated 

loan?’’ For me, it includes a reasonable interest rate, underwriting 

for ability to pay both regular bills and principal and interest on 

the loans, and a limit on the total number of loans a consumer can 

take out. 

122 

Q.5. Michael Flores’ recent study, Online Short-Term Lending, 

points out that the primary alternatives to payday loans are often 

significantly more costly than payday loans. Given that finding, 

would underserved consumers who now rely on potentially less 

costly payday loans be helped or harmed if additional States or the 

CFPB prohibited or severely restricted access to these loans? If 

credit products like payday loans or banks’ deposit advances are 

eliminated, what happens to the demand for such products? 

A.5. I strongly disagree with the idea that payday loans and other 

high-cost loans of 400–1,100 percent interest are cheaper than 

these other costs, overdraft fees, etc. . . . The data do not uniformly support this conclusion. Moreover, many studies show that 

people are better off once payday and other high-cost lenders leave 

their State. I have seen no proof from any source that people are 

better off in places where high-cost loans are available. If anything, 

the opposite is true. 

Q.6. Do you support or oppose the PEW recommendations? Could 

you please explain your reasoning? 

A.6. I am not familiar with all of the PEW recommendations, but 

can agree that these features are needed in the short-term loan 

market: 

• reasonable APRs; 

• repayment periods longer than 90 days; 

• loan structures that permit borrowers to repay principal along 

with interest as a loan progresses; and 

• underwriting for all loans. 

I myself believe that other features are also desirable. There 

must be a limit on the number of loans people can have out at any 

one time on order to make the underwriting make sense. Also, I am 

less inclined to favor a law like Colorado’s, which allows interest 

rates of up to 200 percent, and less tolerant in general of triple 

digit interest rates. This is in part because I have seen the harm 

done to many consumers who are stuck in these loans for long periods of time, and who are deeply sorry they took out the loans, and 

also because I know the public supports interest rate caps, even the 

conservative public. 

123 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

LETTER FROM THOMAS J. CURRY, COMPTROLLER OF THE CURRENCY, 

SUBMITTED BY CHAIRMAN BROWN 

124 

125 

LETTER FROM JOHN W. RYAN, PRESIDENT AND CEO, CONFERENCE OF 

STATE BANK SUPERVISORS 

126 

127 

STATEMENT SUBMITTED BY THE AMERICAN FINANCIAL SERVICES 

ASSOCIATION 

128 

129 

130 

131 

132 

133 

134 

135 

136 

137 

138 

139 

140 

141 

142 

143 

144 

145 

146 

147 

148 

149 

150 

151 

152 

153 

154 

155 

156 

157 

158 

159 

160 

161 

162 

163 

164 

165 

166 

EMAIL SUBMITTED BY SENATOR VITTER 

167